In March 2021, Congress passed the American Rescue Plan Act (ARPA), which is aimed to help with the effects of the recent pandemic in an effort to rebuild economic recovery. The plan’s goal is to help reduce families living in poverty in America.
This changes the child tax credit (CTC), but only for the year 2021. The new law will increase the credit amount per child and is fully – not partially – refundable. In addition, 50 percent is paid in advance beginning July 15, 2021.
There are still additional details and information yet to be announced, but here’s what we know about the changes so far from the IRS: ¹
What You Need to Know
- For tax year 2021, families claiming the CTC will receive up to $3,000 per qualifying child between the ages of 6 and 17 at the end of 2021. Families can receive $3,600 per qualifying child under age 6 at the end of 2021. ¹
- The amount is fully refundable. Previously, only $1,400 was refundable per dependent. ¹
- The increased amounts are reduced (phased out), for incomes over $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers. ¹
- The advanced payments will be made regularly from July through December to eligible taxpayers who have a main home in the United States for more than half the year. Advance payments will be estimated from information included in eligible taxpayers' 2020 tax returns (or their 2019 if you haven’t filed yet). ¹
- 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. ¹
- Advance payments will be paid electronically using the same system as the stimulus checks. ¹
Negative Components that Could Affect You
- 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. ²
- 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. ²
Keep in mind that these changes are not a permanent part of the law. The IRS has expressed that eligible taxpayers do not need to take any action now other than to file their 2020 tax return if they have not done so.
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 reach out to our team and we can put you into contact with our tax partners.