In March 2021, Congress passed the American Rescue Plan Act, which greatly expands the child tax credit – but only for 2021. The new law increases the credit amount per child, is fully – rather than partially – refundable, and 50 percent is paid in advance beginning July 15, 2021.
Thanks to our expert educational partner, TaxSpeaker, here are the details you need to know:
- Individual tax returns for 2021 qualify for a child credit of $3,000 for children ages 6 to 18. The credit increases to $3,600 for children under age 6 on December 31, 2021.
- The amount is fully refundable. Previously, only $1,400 was refundable per dependent.
- For 2021, there is a stair-step phaseout of the increased amounts. There’s no phaseout up until income of $150,000 on a joint return, but the credit then drops to $2,000 per dependent until $400,000.
- Beginning on July 15, 2021, 50 percent of the credit will be paid in advance via six payments with the remainder paid when your 2021 tax return is filed. This is applicable for individuals maintaining a principle residence in the Unites States for more than half the year.
- Advance payments will be paid electronically using the same mechanism as the stimulus checks.
But here are the potential pitfalls:
- Advance payments will be estimated based on 2020 tax returns (or 2019 if not yet filed). The credit amount will then be reconciled when filing your 2021 tax return. If your income for 2021 is higher than it was in previous years and you’ve reached one of the phaseout thresholds, you’ll have to return the excess payments.
- If you’re pushed out of the credit by the time your tax return is filed but you’ve already received a partial credit via the advance payments, those excess payments are taxable with the 2021 return. So, you’re not simply returning the money; you’re paying tax on it.
Keep in mind that these changes are not a permanent part of the law. They only apply to 2021 for now. If you’d like to opt-out of the advance payments, you can do so through an IRS portal that opens on July 1.
If you have questions or concerns about the new child tax credit or would like an opinion on whether you should elect not to receive the advance payments, please schedule time to chat with our tax team.
Blog by Erica Shaloy, Tax Director.