The American Rescue Plan Act of 2021 (ARPA) ushered in several tax changes that we highlighted in this post last month. One of those tax changes involves the Enhanced Child Tax Credit.
If you have qualifying children under the age of 18, you may be able to claim a child tax credit (You may also be able to claim a partial credit for certain other dependents who are not qualifying children.) The American Rescue Plan Act of 2021 makes substantial and temporary improvements to the child tax credit for 2021, which may increase the amount you might receive.
Ages of qualifying children
The legislation makes 17-year-olds eligible as qualifying children in 2021. Thus, children age 17 and younger are eligible as qualifying children in 2021.
Increase in credit amount
For 2021, the child tax credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age 6). The partial credit for other dependents who are not qualifying children remains at $500 per dependent.
Phaseout of credit
The combined child tax credit (the sum of your child tax credits and credits for other dependents) is subject to phaseout based on modified adjusted gross income (MAGI), which for most people, is your total income subject to taxes (this may differ from your taxable income shown on the tax return if you have certain adjustments). Special rules start phasing out the increased portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the pre-existing phaseout rules.
The following table summarizes the effect of the phaseouts on the child tax credit in 2021, based on MAGI.
Single/Married filing separately
Married filing jointly
Head of household
Up to $75,000
Up to $150,000
Up to $112,500
No reduction in credit
$75,001 to $200,000
$150,001 to $400,000
$112,501 to $200,000
Credit can be reduced to $2,000 per qualifying child, $500 per other dependent
More than $200,000
More than $400,000
More than $200,000
Credit can be reduced to $0
Enhanced Child Tax Credit is Refundable
The aggregate amount of nonrefundable credits allowed is limited to your tax liability. With refundable credits, a taxpayer may receive a tax refund at tax time even if they exceed their tax liability.
For most taxpayers, the child tax credit is fully refundable for 2021. To qualify for a full refund, the taxpayer (or either spouse for joint returns) must generally reside in the United States for more than half of the taxable year. Otherwise, under the pre-existing rules, a partial refund of up to $1,400 per qualifying child may be available. The credit for other dependents is not refundable.
Eligible taxpayers may receive periodic advance payments for up to half of the refundable child tax credit during 2021, generally based on 2020 tax returns. The U.S. Treasury will make the payments between July and December 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6). Due to correspondence backlogs and under-staffing at the IRS, it remains to be seen if they can make good on sending out those payments on a timely basis this year.
If you would like to review your current investment portfolio, discuss any other financial planning or tax matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.