Congress keeps raising the stakes for the Child Tax Credit (CTC). Following other recent tax law changes, the new American Rescue Plan Act (ARPA) includes several significant enhancements to the CTC for 2021. What’s more, these tax breaks will start paying off in July—not when you file your 2021 tax return.
Background: Prior to ARPA, the maximum CTC for 2018 through 2025 was $2,000 for each qualifying child under age 17 (increased from $1,000 before 2018). Up to $1,400 of the $2,000 maximum credit was refundable.
To qualify, the child had to live with you for at least six months during the year, not provide more than half of their own support and be a U.S. citizen, national or resident alien. You also had to provide the child’s name and Social Security number (SSN) on your return to claim the credit.
However, the CTC was subject to a phase-out based on modified adjusted gross income (MAGI). For 2018 through 2025, the phase-out was scheduled to begin at $200,000 of MAGI for single filers and $400,000 for joint filers. The credit was phased out by $50 per $1,000 (or fraction of $1,000) of MAGI above the threshold.
Now ARPA revises the rules for 2021. Generally, the changes are favorable to taxpayers. This includes the following:
- The maximum credit is increased from $2,000 to $3,000 for a qualifying child. Even better: The CTC goes up to $3,600 for qualifying children under age six. As before, there is no limit on the number of qualifying children.
- The definition of a qualifying child is expanded to include children under age 18 (up from age 17) at the end of the year. This gives some parents an extra year to claim the CTC.
- The credit is fully refundable. For example, if you have two children qualifying for the $3,000 credit, you can cash in on a refund as high as $6,000.
- On the downside, the credit begins to phase out at lower income levels. For 2021, the phase-out begins at $75,000 of MAGI for single filers and $150,000 for joint filers (down from $200,000 and $400,000, respectively). However, taxpayers affected by the new phase-out ranges can elect to claim the $2,000 credit under the prior rules.
- Finally, you do not have to wait to realize the benefits of the increased CTC. The IRS expects to begin sending advance monthly payments of up to 50% of the allowable 2021 CTC in July and intends to finish in December.
To determine your advance payments, the IRS will refer to information on your 2020 Form 1040 (or your 2019 return if your 2020 return has not yet been filed). However, if the IRS determines that it is not feasible to make monthly advance credit payments, it can arrange advance payments based on longer intervals and adjust the monthly payments accordingly. Expect more guidance from the IRS soon.
Caveat: The ARPA changes for the CTC are effective for 2021 only. After 2021, barring any further legislation, the rules go back to the way they were before.
If you have any questions regarding the new CTC rules, do not hesitate to contact your JMF tax advisor.