An increase in child tax credit is part of President Biden’s stimulus package to help tackle the coronavirus pandemic and stimulate the economy. This stimulus package will provide lower-income parents with substantial financial assistance and supports various other efforts to stimulate the economy. It’s known as the American Rescue Plan Act, and was passed by Congress on March 10, 2021. Even though the benefit of a tax credit traditionally isn’t available until after the tax return for the year has been filed, this will be different for 2021. For this credit, the IRS will pay a portion of the credit in advance in the form of monthly payments from July through December.
Details for the increase in Child Tax Credit
Additional Credit Amounts
Normally, the credit is $2,000 per eligible child. For 2021, it increased to $3,000 for each child under age 18, and $3,600 for children under age 6 at the end of the year.
Refundability
A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability. At most, it would bring it down to zero. However a refundable credit offsets the tax liability. Thus any credit amount in excess of the liability is refunded to the taxpayer. Generally, the child tax credit is nonrefundable, but for 2021, it is fully refundable.
High-Income Phaseout for the increase in Child Tax Credit
The credit is designed to only provide parents of lower incomes with a tax benefit. Thus, the credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold.
| 2021 MAGI PHASEOUT – CHILD TAX CREDIT | |
| Filing Status | Threshold |
| Married Filing Jointly | $150,000 |
| Heads of Household | $112,500 |
| Others | $75,000 |
Example 1: Jack and Jill have two children—Ella, age 4, and Joe, age 8. Their child tax credit for 2021 before the phaseout will be $6,600 ($3,600 + 3,000). They file a joint return and their AGI is below $150,000, so they are entitled to the full $6,600. However, if their AGI for 2021 is $170,000, they would have to reduce (phase out) the credit by $1,000 ($50 x [($170,000-$150,000)/1,000]). Thus, their child tax credit would be $5,600.
Note: This phaseout only applies to the increase in the credit. Families that aren’t eligible for the higher child credit would still be able to claim the regular credit of $2,000 per child subject to the normal phaseout thresholds of $400,000 for married couples filing jointly and $200,000 for others.
Example 2: Using Jack and Jill from example #1, they qualified for a credit of $6,600 before phaseout. If their AGI had been $220,000, they would be completely phased out of the additional 2021 credit. However they would still qualify for the normal $2,000 per child credit. That is because their AGI is below the regular $400,000 phaseout threshold. And their credit for 2021 would be $4,000 (2 x $2,000).
Advance Payments of the Child Tax Credit
Under a special provision included in the new tax law, the Secretary of the Treasury has been charged with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments equal to 1⁄12 of the amount the IRS estimates the taxpayer would be entitled to by using the information on the 2020 return.
If the 2020 return has not been filed, the 2019 information is to be used. If the 2019 return is used to determine the advance payments, the amount of the payments can be altered (either reduced or increased) when the 2020 return is filed. The initial advance payment won’t arrive before July 1, 2021, and monthly payments would end in December 2021. Any balance of the credit due to a taxpayer would be claimed on their 2021 tax return.
- Reconciliation on the 2021 Tax Return
The advance payments will reduce the child tax credit claimed on the tax return, but not below zero. If the aggregate amount of the advance payments to the taxpayer exceeds the amount of the allowable credit, the excess must be repaid. That is, unless the taxpayer meets the safe harbor test. - No Repayment Safe Harbor
The amount of the excess advance repayment is eliminated or reduced based on a safe harbor that applies to lower-income taxpayers. Thus, families with a 2021 MAGI below the applicable income threshold (see table below) will not have to repay any advance credit overpayments that they receive.
| SAFE HARBOR APPLICABLE MAGI | |
| Filing Status | Threshold |
| Married Filing Jointly | $60,000 |
| Heads of Household | $50,000 |
| Others | $40,000 |
What Happens Upon A Child’s Death
A child isn’t taken into account in determining the annual advance amount if the death of the child is known to the IRS as of the beginning of the calendar year for which the estimate is made.
Online Portal
The Secretary of the Treasury will establish an online portal for taxpayers to elect to not receive advance payments. This way taxpayers can provide information that would affect the amount of the advance payment. Information could include the birth of a qualifying dependent, change in marital status or significant changes in income.
It will take the Treasury some time to initiate the advance payments. However, if you have questions about the child tax credit, please give this office a call.
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