Updated: Nov 12, 2021
The Child Tax Credit (CTC) is a partially refundable tax credit that is available to individuals who claim a child as a dependent, and that child meets certain conditions. A tax credit is a dollar for dollar elimination of your tax liability, which is not to be confused with a deduction, which lowers the base the tax is figured from. For 2020, the CTC credit is $2,000 per eligible child, refundable up to $1,400. This means if your tax liability equals or exceeds $2,000, the full credit will be applied against your liability. But if you have no tax liability, you will only receive $1,400 as a refund. The CTC is phased out by $50 for every $1,000 a taxpayer’s Adjusted Gross Income (AGI) is above certain thresholds - $400,000 for Married Filing Joint taxpayers, and $200,000 for Single taxpayers.
As part of the American Rescue Plan Act of 2021, for 2021 the CTC is increased to $3,000 per child, but if the child is under age 6, the credit is increased to $3,600. The Act also makes the CTC fully refundable for 2021. Eligible children must meet the Qualifying Child test as a dependent. This means the child is your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (example – your grandchild, nephew, or niece). In addition to being a Qualifying child, the child must be under the age of 17, must not have provided over half of his or her support during the year, lived with you for more than half of the year, claimed as a dependent on your 2020 return, is a US Citizen, national or resident alien, and the child must not have filed a joint return for the year. The American Rescue Plan, however, expands the credit for 2021 to apply to children who are 17 years of age.
Even though the American Rescue Plan expanded the tax credit, it also decreased the phase-outs for the enhanced credits. The enhanced credit begins to phase out at AGI of $150,000 for Married Filing Joint; $112,500, for Head of Household; and $75,000 for Single. The higher phaseouts are still in place for the base credit. Like the base credit, the enhanced credit is phased out by $50 for every $1,000 the taxpayer’s AGI exceeds the above thresholds. For example, if a Single taxpayer has AGI of $95,000, that taxpayer is $20,000 over the $75,000 threshold. $50 x 20 equals $1,000 reduction in the available credit. So instead of a credit of $3,000 for a child between the ages of 7 and 17, the credit is reduced by $1,000 to $2,000.
The American Rescue Plan Act expands the CTC for the 2021 tax year, which means that in a normal year, a taxpayer would not receive the benefit of the credit until he or she files their 2021 tax returns, which will not be until the Spring of 2022. However, the Act requires the IRS to pay half of the tax credit in advance. The advance payments will be in the form of monthly payments made directly to taxpayers starting in July of 2021 and continuing through December 2021. The payments will be based on 2020 or previous tax returns filed and be split into six equal monthly payments. The payments will be made the same way the stimulus payments were made. If you received the stimulus via direct deposit, you can expect to receive the advance CTC payments by direct deposit. Likewise for paper checks. As with the previous stimulus payments, the IRS is required to provide an online portal for non-filers to report their status, or for taxpayers who did file for 2020 to make updates – such as new baby born in 2021. If a new child is not reported through the portal, the taxpayer can expect to receive the full credit when they file their 2021 tax return in the Spring of 2022.
One downside to the expanded credit and advanced payments – as stated, qualification will be based on a taxpayer’s 2020 (or earlier) return. If you have had a significant change in income, and expect your 2021 AGI to be above the thresholds, you may be required to pay back part of the advance when you file your 2021 return next Spring. To avoid this re-payment, you can opt out through the online portal that the IRS will be providing (not yet available as of this writing). This is the same portal where you can notify the IRS of a new child for consideration of the credit and advance.
The expansion of the Child Tax Credit through the American Rescue Plan Act of 2021 is the federal government’s way of providing further support to taxpayers who may have suffered adverse financial effects resulting from the Coronavirus pandemic. Contact my office if you have additional questions about how the credit works, eligibility, or how to report changes to your status.