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Advanced Child Tax Credit

On March 11, 2021, President Joe Biden signed a substantial relief bill, the American Rescue Plan Act (ARPA) of 2021. This expands the Child Tax Credit (CTC) for the 2021 tax year by increasing the credit amounts for many taxpayers.  While this bill is good news for parents with qualifying children, families receiving the credit should be aware of the effect that it could have on their refunds when they file their tax returns for 2021.

For 2021, families can receive up to $3,000 per qualifying child between the ages of 6 and 17 years of age at the end of 2021 or $3,600 per qualifying child under age 6 at the end of 2021. These increased amounts are phased out beginning at incomes over $150,000 for married filing joint (MFJ) or qualifying widows or widowers (QW), $112,500 for heads of household (HOH), and $75,000 for all other taxpayers. For each $1,000 of income above the threshold, the credit is reduced by $50 incrementally until it drops to $2,000. MFJ earning $170,000 and HOH earning $136,500 can claim the $2,000 until they reach $400,000 or $200,000 in income, respectively. The same $50 incremental deduction for each $1,000 of income applies until the credit reaches $0.

The 2021 CTC is fully refundable, meaning that taxpayers can benefit even if they have no earned  income or owe no income taxes.  Half of the credit can be sent to qualifying taxpayers in monthly payments during the last six months of the year. These child tax credit payments will begin July 15th  and will continue on the 15th  of every month unless it falls on a weekend or holiday. Taxpayers have the ability to receive a maximum of $300 per child, per month, from  July through December with this Advanced CTC option. The IRS is in the process of creating an online portal. This portal will allow taxpayers to update their tax information and opt out of the monthly stimulus, which is slated to be up and running by July.  It is important to note that if a taxpayer receives the monthly prepayment of the credit, the refund received when the 2021 return is filed will be substantially lower since only half the credit can be claimed on the return ($1,800 per child at most). 

For divorced parents, the custodial parent can claim the child as a dependent, and the credit will not be split between both parents. The parent claiming the child as a dependent should use the portal to update their tax information to claim the child for 2021 so they will receive the advanced payments. Similarly, if a taxpayer has a child in 2021, their dependent information must be updated in the IRS portal to receive the credit.  Since eligibility for the advanced payments is based on the federal tax return  filed for the 2020, the IRS has provided two procedures for individuals who were not required to file a return for 2020 to file returns to receive the credit.  The first procedure allows for the filing of a simplified return.  The second enables them to file a complete return electronically even if they have zero adjusted gross income.

Below is a chart pertaining to the differences between the 2021 CTC and the current CTC.

Child Tax Chart - 2021

 


If you need any assistance regarding this credit, please contact us.

Article Submitted by Lorin Manna

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