Recently, there were temporary changes made to the child tax credit that will benefit many taxpayers. As part of The American Rescue Plan Act of 2021, that was enacted in March 2021, the child tax credit has increased in amount, is fully refundable, and may be partially received in advance through monthly payments starting July 15th. Though these tax changes are temporary and only apply to the 2021 tax year, they may present important cashflow and financial planning opportunities today.
Increase in credit amount
For 2021, the child tax credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age 6). The partial credit for other dependents who are not qualifying children remains at $500 per dependent.
Ages of qualifying children
The legislation makes 17-year-olds eligible as qualifying children in 2021. Thus, children age 17 and younger are eligible as qualifying children in 2021.
Phaseout of credit
The combined child tax credit (the sum of your child tax credits and credits for other dependents) is subject to phaseout based on modified adjusted gross income (MAGI). Special rules start phasing out the increased portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the pre-existing phaseout rules.
The following table summarizes the effect of the phaseouts on the child tax credit in 2021, based on MAGI.
| Single/Married filing separately | Married filing jointly | Head of household | Combined credit |
| Up to $75,000 | Up to $150,000 | Up to $112,500 | No reduction in credit |
| $75,001 to $200,000 | $150,001 to $400,000 | $112,501 to $200,000 | Credit can be reduced to $2,000 per qualifying child, $500 per other dependent |
| More than $200,000 | More than $400,000 | More than $200,000 | Credit can be reduced to $0 |
Refundable credit
The aggregate amount of nonrefundable credits allowed is limited to tax liability. With refundable credits, a taxpayer may receive a refund at tax time if they exceed tax liability.
For most taxpayers, the child tax credit is fully refundable for 2021. To qualify for a full refund, the taxpayer (or either spouse for joint returns) must generally reside in the United States for more than half of the taxable year. Otherwise, under the pre-existing rules, a partial refund of up to $1,400 per qualifying child may be available. The credit for other dependents is not refundable.
Advance payments
Eligible taxpayers may receive periodic advance payments for up to half of the refundable child tax credit during 2021, generally based on 2020 tax returns. The U.S. Treasury will make the payments between July and December 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6).
If you are eligible to receive advance Child Tax Credit payments based on your 2020 tax return or 2019 tax return, you generally will receive those payments automatically without needing to take any additional action. You must act if you have not filed your 2020 tax return or 2019 tax return. The IRS has an online Non-Filer tool that allows individuals who weren’t required to file (and have not filed) to register for advance Child Tax Credit payments.
If you do not want to receive monthly advance Child Tax Credit payments because you would rather claim the full credit when you file your 2021 tax return, or you know you will not be eligible for the Child Tax Credit for the 2021 tax year, you can unenroll through the Child Tax Credit Update Portal (CTC UP).
In early 2022, the IRS will send you Letter 6419 showing the total amount of advance Child Tax Credit payments that were disbursed to you during 2021. Keep this letter regarding your advance Child Tax Credit payments with your tax records. You may need to refer to this letter when you file your 2021 tax return during the 2022 tax filing season.
With any tax law change, it’s important to revisit your financial plans. We can help you determine how much credit you may be entitled to and whether advance payments are appropriate. How you choose to receive the credit (partially advanced via monthly payments or solely on your next year’s return) could have many impacts to your financial plans. Contact us if you have any questions about how this may impact you.
Sources
Broadridge Investor Communication Solutions, Inc. Copyright 2021
IRS.gov accessed July 15, 2021 https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-a-general-information
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