2021 Expanded Child Tax Credit Rollout
The American Rescue Plan Act of 2021 (ARPA) expanded the Child Tax Credit.
Effective for the 2021 tax year only, the Child Tax Credit increased to $3,000 per qualifying child or $3,600 in the case of a qualifying child who has not yet reached the age of 6 by the close of the calendar year. The full amount of the Child Tax Credit is a refundable credit. Most tax credits are nonrefundable: If the credit amount exceeds the tax owed, no refund is given for the credit. Refundable credits are different: If the credit amount exceeds the tax owed, a refund may be due to the taxpayer for the credit.
The $500 per dependent credit for a dependent who is not a qualifying child did not increase and is not refundable.
The increased Child Tax Credit for 2021 phases out when the taxpayer’s modified adjusted gross income (AGI) exceeds the following threshold amounts by filing status:
Married Filing Jointly (MFJ), Qualifying Widow(er) (QW): $150,000
Head of Household (HOH): $112,500
Single, Married Filing Separately (MFS): $75,000
This phase-out is separate from the phase-out of the Child Tax Credit, in general, under prior tax law. For tax years 2018 through 2025, the Child Tax Credit is phased out when modified AGI exceeds $400,000 for a MFJ return and $200,000 for all others. Once the increase of the Child Tax Credit is phases out, the $2,000 per qualifying child credit still applies until modified AGI reaches the $400,000/$200,000 thresholds.
Advance Payment of Child Tax Credit
Starting in July 2021, the Treasury will issue advance payments of the child tax credit based on 2019 or 2020 tax return information. The purpose of the advance payments is to provide taxpayers access to funds from the credit before their 2021 tax return is filed (during tax season 2022).
The IRS will estimate the total advance credit amount, determine a monthly allotment of the advanced credit, and issue the monthly allotment between July 2021 and December 2021. The Child Tax Credit claimed on the 2021 tax return will be reduced by the total amount of advance payments received. If the total of the advance payments exceed the credit and safe harbor allowed when calculating actual 2021 tax return figures, the excess is added to the taxpayer’s tax liability for 2021.
The Treasury will create an online portal allowing taxpayers to opt out of receiving advance payments. In addition, taxpayers can provide information regarding changes in income, martial status, and the number of qualifying children for purposes of determining each taxpayer’s maximum eligible credit.
More information will be provided by the IRS soon. Check: https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021