Q&As on Your Child Tax Credit

The American Rescue Plan Act, which was signed into law on March 11, 2021, dramatically changed the child tax credit for 2021. The law made the credit fully refundable and extended it to dependents 17 years old or younger (previously the credit was available only for children under age 17). Also, part of the expected credit is being paid out in monthly installments. This one-year change may put money into parents’ pockets before tax returns are filed.

How much credit are you entitled to?

For 2021, there is a two-tier credit: up to $3,000 for a child age 6 through 17, and up to $3,600 for a dependent age 5 or younger. There is no limit to the number of eligible children for whom the credit may be claimed. For 2020 the credit was limited to $2,000 per qualifying child.

For example, a single parent has three children, ages 12, 8, and 4. Assuming the parent’s income is below the thresholds below, the child tax credit for 2021 is $9,600 ($3,000 + $3,000 + $3,600).

The maximum credit applies for those with modified adjusted gross income (MAGI) of:

• $75,000 or less for singles,
• $112,500 or less for heads of household and
• $150,000 or less for married couples filing a joint return and qualified widows and widowers.

Above these income thresholds, the increase in the credit from $2,000 per child for 2020 to $3,000 or $3,600 per child for 2021 (depending on the age of the child) is phased out. The $1,000 or $1,600 of additional credit is reduced by $50 for every $1,000 (or part of $1,000) in MAGI exceeding the threshold. If the $1,000 or $1,600 additional amount is completely phased out, the remaining $2,000 credit is phased out under prior-law rules where MAGI exceeds $200,000, or $400,000 if married filing jointly.

How much may you receive in advance of filing your return?

From July 15, 2021, through the end of the year, eligible parents will receive part of the credit in monthly payments. The total of the monthly advance payments will be one half of the expected credit, which is figured by the IRS based on the number of qualifying children, income and marital status shown on the taxpayer’s 2020 return if the IRS has processed that return, or on the 2019 return if the 2020 return has not been processed.

The payments are made automatically to eligible taxpayers. They do not have to do anything to receive payments.

Low-income taxpayers who are not required to file a 2020 return, who have their main home in the U.S., and whose child(ren) was born before 2021 may use an IRS online tool at https://www.freefilefillableforms.com/#/fd/childtaxcredit to register for the credit and receive monthly payments.

What happens to the credit on your 2021 return?

You must file a 2021 return to reconcile your advance child tax credit payments with the credit to which you are entitled. You will figure the credit you are entitled to based on your 2021 family status and income, and then reduce the credit by the advance payments received.

• If you are entitled to a 2021 credit that exceeds your advanced payments, you’ll simply receive the balance as a credit on your return. If it exceeds your tax liability, it is refundable to you.
• If your advanced payments exceed the credit you are entitled to, such as where MAGI is higher or the number of qualifying children is lower than in the year (2020 or 2019) used by the IRS to figure the advances, so that you should have received less or no credit, you generally have to repay the excess, which will reduce your refund or increase what you owe on your 2021 return. However, a safe harbor may reduce or eliminate the repayment, depending on your income.

Conclusion

The new and improved child tax credit is only for 2021. Unless Congress extends the law, the child tax credit reverts in 2022 to old limits (maximum of $2,000 per child under age 17, with up to $1,400 refundable).