Child Tax Credits Expanded for 2021
Child Tax Credits Expanded for 2021
By Wayne M. Lenell, CPA, PhD
The “American Rescue Plan” Act of 2021 has increased the Child Tax Credit (CTC) available to taxpayers with dependent children and made some other changes to this tax credit as follows:
The upper age limit for qualified dependents has increased from a maximum age of 16, to a maximum age of 17.
The CTC now has two qualifying age brackets:
A. From birth to five years of age.
B. From six to 17 years of age.
The amount of credit has increased:
A. From $2,000 to $3,600 for dependents from birth to five years of age.
B. From $2,000 to $3,000 for dependents from six to 17 years of age.
The CTC is fully refundable. Prior to 2021, if a taxpayer’s Federal income tax liability was zero, the taxpayer could receive a tax refund for up to $1,400 per qualifying child (referred to as a “refundable credit”). this meant that $600 of the $2,000 credit was not used. For 2021, the full amount of CTC is refundable.
Prior to 2021, a taxpayer needed a minimum of $2,500 in earnings to qualify for the CTC. For 2021, that earning floor has been eliminated.
Taxpayers will no longer need to wait until filing their tax returns to receive the credit. Beginning in July 2021, the IRS intends to begin issuing CTCs on a monthly basis, though the IRS has issued a caution that it may not make the July deadline nor be able to issue monthly checks. Instead, the IRS may issue “periodic” checks. For example, a taxpayer qualifying for a $3,000 CTC, would begin receiving $250 per month beginning in July 2021 if all goes well with the IRS computer systems.
The balance of any CTC not paid monthly can be claimed on the taxpayer’s 2021 tax return filed in 2022. Using the example in item 6 above, if the taxpayer received six payments of $250 each during 2021, that taxpayer would claim the remaining $1,500 of the $3,000 CTC when filing the 2021 tax return.
Taxpayers will also use their 2021 tax returns to reconcile other differences in CTC payments such as when a taxpayer receives payments for children who no longer qualify, or for taxpayers under divorce decrees that transfer the child dependency to the other parent.
The IRS will use the most current tax return information on file to begin distributing the CTC monthly (or periodic) checks similar to how the IRS used this information to distribute the stimulus checks.
The IRS will establish an internet portal for taxpayers to update their information for such things as:
A. Age of dependents.
B. Bank account information for receiving electronic payments.
C. Dependency qualifications for divorced parents.
D. Changes in income levels.
E. Changes in marital status.
F. Children born in 2021.
G. Taxpayers will also have the option to decline the monthly or periodic payments and, instead, receive the CTC when filing their income tax returns.
The IRS has established a dual set of “phase out” rules which consists of a phase out for the pre-2021 CTC of $2,000 and a separate phase out for the additional $1,000 or $1,600 credit.
The phase out for the new amount of CTC (the excess of the $3,600 or $3,000 over the 2020 level of $2,000) uses a lower level of adjusted gross income than the 2020 phase out used. The phase out for the new additional $1,000 or $1,600 of CTC is as follows:
Phase Out
Begins at
Single taxpayers: $ 75,000
Head-of-households: $ 112,500
Married filing jointly: $ 150,000
As adjusted gross income exceeds the amounts listed above, the CTC begins to phase out at a rate of $50 per $1,000 (or fraction thereof) of the excess.
Example: A married couple with a 10-year-year old child and adjusted gross income in 2021 of $420,000. Their income exceeds the limit by $270,000 which totally eliminates the $1,000 additional CTC for 2021.
The phase out for the $2,000 portion of the CTC is a carryover of the 2020 rules, that is, the phase out begins at adjusted gross incomes $4000,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. Once the $400,000 or $200,000 income limit is exceeded, the credit is reduced $50 for each $1,000 (or fraction thereof) of adjusted gross income.
Example (continued): Though, the married couple in the example above did not qualify for the additional $1,000 CTC for 2021, the couple qualifies for a portion of the $2,000 CTC. The adjusted gross income of $420,000 exceeds the phase out lower limit by $20,000. The phase out formula of $50 per $1,000 excess income reduces the CTC by $1,000, so the married couple would receive a reduced CTC of $1,000 (the $2,000 total CTC reduced by $1,000 because of the excess income).
At this time, Congress has made these changes to the CTC effective for just 2021. President Biden, however, has gone on record saying that he would like to see the 2021 CTC become permanent. Watch for updates.