03/13/2021
Change to Child Tax Credit for Tax Year 2021 under the American Rescue Plan Act of 2021
With new legislation here are the changes to the Child Tax Credit for 2021:
Children under the age of 18 will now qualify
Credit will increase to $3,000 per child ($3,600 per child under age 6) for many families
Removal of the $2,500 earnings floor for the Additional Child Tax Credit
Credit will be fully refundable
Allow half of the credit to be paid in advance by having the IRS send periodic payments to families from July 2021 to December 2021
Phase-Outs for the Child Tax Credit
Not all families will be eligible for the full higher Child Tax Credit.
The increased Child Tax Credit has two phase-outs for 2021 as follows:
1st Phase-Out – The credit begins to be reduced to $2,000 when AGI reaches the following:
Single filers - $75,000
Head of household filers - $112,500
Married filing joint filers - $150,000
2nd Phase-Out – Remaining $2,000 credit will begin to be reduced to zero when the AGI reaches the following:
Married filing joint filers - $400,000
All other filing status’ - $200,000
Advance Payment of Child Tax Credit for 2021
The law calls for the IRS to send out payments (mainly in the form of direct deposits) periodically from July through December to all eligible families. These periodic payments would account for half of the family's 2021 Child Tax Credit. If monthly payments were made, this would result in payments of up to $250 per child ($300 per child under age 6) for six months.
The advance payments will be calculated based on the taxpayer’s 2020 federal return or 2019 return if the 2020 return has not been filed at the time the advance payments begin.
For example:
A family of 5 with three children ages 11, 8, and 5 (assuming the family qualifies for the higher child credit and doesn't opt out of the advance payments), could get $800 per month from the IRS from July through December, for a total of $4,800. They would then claim the additional $4,800 in child tax credits when they file their 2021 return next year.
IRS Online Tool for Advance Child Tax Credit
IRS will create an online tool that will allow taxpayers that are eligible to receive the Advance Child Tax Credit to do the following:
Opt-out of receiving the advance payments
Provide information on changes to:
Income
Marital status
Number of qualifying children
Reconciliation of Advance Payments with Calculated 2021 Child Tax Credit
If the taxpayer receives advance payments of the Child Tax Credit, then these payments must be reconciled with the calculated 2021 Child Tax Credit that will be calculated on the 2021 federal return.
The result of the reconciliation will be one of the following:
Refundable credit – Calculated credit is greater than the advance payments received
Additional Tax – Advance payments received are greater than calculated credit
Safe Harbor for Excess Advance Payments
For lower income families there is a safe harbor amount of $2,000 per child if the advance payments exceed the calculated credit.
Here is how it works:
Taxpayer does not have to repay an overpayment of up to $2,000 per child (safe harbor amount) as follows:
Single – Full safe harbor amount when AGI is below $40,000. Phases out between $40,000 and $80,000.
Married filing joint – Full safe harbor amount when AGI is below $60,000. Phases out between $60,000 and $120,000.
Head of Household – Full safe harbor amount when AGI is below $50,000. Phases out between $50,000 and $100,000
