The American Rescue Plan Act (ARPA) signed into law earlier this month by President Biden made significant temporary enhancements to the child tax credit (CTC). These enhancements temporarily expand the eligibility for, and the amount of, the child tax credit (CTC) for tax years beginning in 2021 and require the IRS to make monthly advance payments of the credit to taxpayers in July through December of 2021.
Before ARPA, the $2,000 CTC was phased out (reduced) if your modified adjusted gross income (AGI) was over $200,000, or over $400,000 if you filed jointly. A qualifying child was under the age of 17, related to you, and living with you for at least six months during the year. The CTC was also partially refundable—to the extent of 15% of your earned income in excess of $2,500. An alternative formula for determining refundability applied for taxpayers with three or more qualifying children. But the maximum refundable credit for 2021 was $1,400 per qualifying child. The Family Credit, a $500 nonrefundable credit (per dependent) is also allowed for each qualified dependent who isn’t a qualifying child under the CTC definition.
For the year 2021, ARPA expands the CTC qualifying child definition to include 17-year-olds (i.e. children who haven’t turned 18 by the end of 2021). It also increased the amount per child to $3,000 ($3,600 for children under age 6 as of the close of the year). However, increased credit amounts are subject to their own phase-out 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. After applying the above phase-out rule to the increased amount, your remaining $2,000 of CTC is subject to the existing phase-out 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 phase-out rules. The CTC is fully refundable for 2021 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. The phase-out rules apply regardless of refundability, and the $500 family credit for dependents other than qualifying children remains nonrefundable.
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 can benefit you in 2021, please contact us for more information.