The American Rescue Plan Act (ARPA) was signed into law on March 11, 2021. Among its many provisions were three significant changes to the Child Tax Credit (CTC) for 2021:
- Increase in the amount of CTC certain taxpayers are allowed to claim
- Makes the CTC fully refundable
- Allows for part of the CTC to be “advanced” to taxpayers during the last six months of 2021.
Increase in Amount of Child Tax Credit
Under ARPA, taxpayers may claim a maximum CTC of $3,600 for each qualifying child up to six years old and $3,000 for each qualifying child between the ages of 6 and 17. Prior to the enactment of the ARPA, the child tax credit was limited to $2,000 per qualifying child under the age of 16.
The increased CTC begins to phase out for taxpayers with adjusted gross income (AGI) of $75,000 for single filers, $112,500 for heads of household, and $150,000 for joint filers. The “original” $2,000 CTC is still available for taxpayers with AGI under $200,000 (single and heads of household) or $400,000 (joint filers).
Fully Refundable Child Tax Credit
The ARPA made the CTC fully refundable, which means taxpayers whose pre-CTC tax liability is less than their CTC will get the excess refunded. As an example, John and Susan are a married couple with an AGI of less than $150,000 and have four kids between the ages of 6 and 17. They owe $5,000 of tax before the CTC. Since their CTC is $12,000 ($3,000 per child), they will receive a refund of $7,000 when they file their 2021 tax return.
Advanced Payments of Child Tax Credit
In addition to the changes detailed above, ARPA significantly alters the way the CTC is administered by authorizing the Internal Revenue Service to pay out half of a taxpayer’s expected 2021 CTC in six monthly installments beginning on July 15, 2021.
From the example above, John and Susan will be able to receive payments of up to half of their projected child tax credit ($6,000) in equal installments on the 15th of every month from July to December of 2021. Their expected advance payments would be $1,000 per month.
To determine who is eligible for these payments and in what amounts, the IRS will look to the taxpayers’ most recently filed tax returns. Those who were not required to file a tax return for 2019 or 2020 can register to receive the payments using the IRS Non-filer Sign-up Tool.
It is vitally important to note that these CTC payments are “advances” of a taxpayer’s projected 2021 CTC and may have to be paid back if a taxpayer’s situation changes compared to the tax year the IRS used to determine payment eligibility. They are not stimulus payments. For example, John and Susan sell their company during the year and have a 2021 AGI of $1,000,000. In 2020, their AGI was under $150,000, so they received six payments of $1,000 each. Since their AGI is so high in 2021, they are completely phased out of the CTC. Since they received $6,000 of payments they were not entitled to, they will have to pay back the $6,000 of advanced tax credits when they file their 2021 tax returns.
Other items to note about the advance CTC payments:
- Taxpayers are automatically opted in to receive the payments.
- Taxpayers can opt-out of receiving the advance payments via the IRS’s Child Tax Credit Update Portal. If a taxpayer does opt-out, they will receive the “full” amount of the CTC on their 2021 tax return. For married couples, both individuals must opt-out of the payments.
- The IRS will use the direct deposit information from a taxpayer’s most recently filed return to determine where to send the payments.
- As of the date of this article, the CTC Update Portal currently does not have the functionality to change direct deposit information, mailing addresses, number of children the 2021 CTC will be claimed for, or projected income levels, but the IRS has stated that these enhancements will be available by the fall.
- Taxpayers will receive a letter from the IRS early in 2022 stating the amount of advance CTC payments they received. Taxpayers should save this letter and provide it to their tax preparers.
- The changes to the CTC under the ARPA are only in place for 2021. The CTC is slated to revert to prior law beginning in 2022.
If you have questions about how the new Child Tax Credit rules will apply to your specific situation, please contact your GBQ tax professional.
Article written by:
Rob Roll, CPA
Manager, Tax & Business Advisory Services