We thought you might be interested to know about the significant enhancements made by the American Rescue Plan Act of 2021 ("the Act") to temporarily expand the eligibility for, and amount of, the child tax credit (CTC) for tax years beginning in 2021 and to require IRS to make monthly advance payments of the credit to taxpayers in July through December of 2021.
Pre-Act law: The CTC is $2,000 per "qualifying child." And, a qualifying child is defined as an under-age-17 child, whom you could claim as a dependent (i.e., a child related to you, who, generally, lived with you for at least six months during the year), and who was a U.S. citizen or national, or a U.S. resident.
The $2,000 CTC (and the $500 ODC below) is phased-out (reduced) if your modified adjusted gross income (AGI) is over $200,000, or over $400,000 if you filed jointly, at a rate of $50 per $1,000 (or part of a $1,000) by which modified AGI exceeds the threshold amount.
The CTC is partially refundable to the extent of 15% of your earned income in excess of $2,500; an alternative formula for determining refundability applies for taxpayers with three or more qualifying children. But, under these rules, the maximum refundable credit that may be taken for 2021 is $1,400, per qualifying child.
In addition, a $500 nonrefundable credit (per dependent) (the so called "ODC" or "family credit") is allowed for each qualified dependent who isn't a "qualifying child" under the CTC definition.
The Act Expansion: CTC temporarily expanded for 2021. Under the Act, for tax years beginning in 2021, the CTC is expanded as to eligibility, and amount, as follows:
(1) The definition of a qualifying child is broadened for 2021 to include 17 year-olds (i.e., children who haven't turned 18 by the end of 2021).
(2) The CTC is increased to $3,000 per child ($3,600 for children under age 6 as of the close of the year) for 2021. But, the increased credit amounts are subject to their own phase out rule. So, for 2021, the CTC is subject to two sets of phaseout rules. The increased CTC amount (the $1,000 or $1,600 amount) is phased out for taxpayers with modified AGI of over $75,000 for singles, $112,500 for heads-of-households, and $150,000 for joint filers and surviving spouses. And, after applying that phaseout rule to the increased amount, your remaining $2,000 of CTC is subject to the existing phaseout rules (i.e., the $2,000 of credit is phased out for taxpayers with modified AGI of over $200,000/$400,000 for joint filers). If you aren't eligible to claim an increased CTC in 2021, you can still claim the regular $2,000 CTC, subject to the existing phaseout rules.
(3) The CTC is fully refundable for most taxpayers for 2021. The CTC for 2021 is fully refundable for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year. So, as to these taxpayers, neither the earned income/alternative formula, nor the $1,400 maximum limitation, applies.
A member of the U.S. Armed Forces stationed outside the U.S. while serving on extended active duty is treated as having a principal place of abode in the U.S.
The phaseout rules apply regardless of refundability, and the $500 ODC for dependents other than qualifying children remains nonrefundable.
Advance payments of the 2021 CTC: IRS must establish a program to make periodic (monthly) advance payments (generally by direct deposits) equal to 50% of eligible taxpayers' 2021 CTCs in July 2021 through December of 2021. To determine your advance CTC payments, IRS will look at your 2020 return, or, if it's not yet filed, your 2019 return.
If you receive advance CTC payments that are in excess of the CTC actually allowable to you for 2021, you'll have to repay the excess amounts (by increasing tax liability on your 2021 returns). But, for certain low and moderate income taxpayers, the excess may be reduced by a safe harbor amount, limiting the amount by which they'll have to increase tax liability, and allowing them to keep a portion of the excess amount.
Social security number still required to claim CTCs for 2021: Not changing for 2021, is the requirement that to claim the CTC, you must include each qualifying child's name and social security number (SSN) on your tax return, and that those SSNs must have been issued before the return's filing due date (including extensions). If a qualifying child doesn't have an SSN, you will be able to claim the $500 ODC for that child-using an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).
To update your Child Tax Credit information during 2021
The IRS launched on IRS.gov a Child Tax Credit Update Portal (CTC UP), which will allow you to elect not to receive advance Child Tax Credit payments during 2021 and update your bank account information. More functionality will be added later this year that will allow you to:
- Update your mailing address;
Add or subtract the number of your qualifying children, including by reason of the birth or adoption of a child;
- Report a change in your marital status; and
- Report a change in your income.
The changes made by the Act should make the CTC more valuable and more widely available to many taxpayers in 2021. If you have children under 18, or other dependents, and would like to determine if these changes benefit you in 2021, please give us a call.