A child tax credit for up to $2,000 per qualifying dependent may be allowed to be claimed on an individual’s federal income tax return in 2020. A qualifying child must be:
- A son, daughter, brother, sister, stepchild, stepbrother, stepsister, foster child, or any descendant of any of them,
- A dependent of the taxpayer that lives with the taxpayer for more than half of the year,
- A child under the age of 17 by the end of the tax year, and
- A U.S. citizen, U.S. resident, or U.S. national.
The credit amount decreases by 5% of the modified adjusted gross income (MAGI) in excess of the threshold set by the Tax Cuts and Jobs Act (TCJA) to be $400,000 if married filing joint (MFJ) and $200,000 for all others for tax years 2018 – 2025. (MAGI adds back mainly the foreign earned income and/or housing exclusion to adjusted gross income.) Therefore, once a single taxpayer with one qualifying child reaches $240,000 in MAGI, the credit is fully phased out and no child tax credit is received.
The child tax credit is generally nonrefundable – it is limited to the sum of the regular tax liability and the AMT liability net of the foreign tax credit and other nonrefundable personal credits. Once this net tax liability is reduced to zero, a portion of the remaining child tax credit may be claimed for a refund. The refundable portion is limited to 15% of the amount of earned income in excess of $2,500. This refundable credit is referred to as the Additional Child Tax Credit and can be a maximum of $1,400 per qualifying child.
Expanded Rules for 2021
The American Rescue Plan Act of 2021 (ARPA) was signed into law by President Biden on March 11, 2021 to address the continuing economic impact of the coronavirus (COVID-19) pandemic. Under ARPA, the rules mentioned above have been modified to better assist families for the 2021 tax year.
Under the ARPA, the following enhancements are made for the 2021 tax year:
- The child tax credit has increased from $2,000 to $3,000 for each qualifying child from age 6 to 17 years old by December 31 (the dependent child must be under 18 for the entire year).
- The child tax credit has increased from $2,000 to $3,600 for each qualifying child under 6 years old by December 31 (the dependent child must be under 6 for the entire year).
- The credit has been made fully refundable for taxpayers with their principal residence in the U.S. for more than half the year.
- Half the credit may be paid in advance in 6 monthly installments beginning July 15.
Phase-out Thresholds and Credit Reductions for 2021
The $1,000 increase in child tax credit for qualifying children 6 – 17 years old ($1,600 increase for qualifying children under 6 years old) phases out over a separate income range from the $2,000 credit. The $1,000/$1,600 increase in credit is reduced by $50 for each $1,000 of MAGI over:
- $150,000 for a joint return or surviving spouse
- $112,500 for head of household
- $75,000 for individuals or married filing separate
This first phase-out cannot reduce the credit below the $2,000 credit that applied for pre-2021 tax years.
Tom and Brigette file jointly with 3 qualifying children under 6 and 1 qualifying child over 6. They have $175,000 of MAGI. Their child tax credit is calculated as follows:
- 3 children x $1,600 + 1 child x $1,000 = $5,800
- ($175,000 – $150,000) x .05 = $1,250 reduction of the 2021 credit increase
- The 2021 credit increase is $5,800 – $1,250 = $4,550.
Because their MAGI is below the $200,000 threshold, they would also receive the $2,000 credit for each qualifying child. Therefore, their total credit is $12,550 ($4,550 + $8,000).
One of the most significant expansions to the child tax credit is allowing taxpayers with a main home in the U.S. for more than half the year to receive their refundable child tax credit in the form of monthly installments for the second half of 2021.
These are advanced payments and are not considered income; however, they will affect the amount of child tax credit the taxpayer may claim on their 2021 tax return. Other than reducing the credit claimed on taxpayers return, they are not subject to any other reduction or offset (past-due child support, debts owed to federal agencies, assessed federal taxes that would otherwise be subject to levy, etc.)
Any taxpayer who does not want to receive advanced payments may unenroll through the IRS “Child Tax Credit Update Portal” (https://www.irs.gov/credits-deductions/child-tax-credit-update-portal). Unenrollment deadlines are as follows:
- To unenroll starting with the July 15 payment, the deadline is June 28, 2021.
- To unenroll starting with the August 13 payment, the deadline is August 2, 2021.
- To unenroll starting with the September 15 payment, the deadline is August 30, 2021.
- To unenroll starting with the October 15 payment, the deadline is October 4, 2021.
- To unenroll starting with the November 15 payment, the deadline is November 1, 2021.
- To unenroll starting with the December 15 payment, the deadline is November 29, 2021.
The portal also allows taxpayers to update mailing addresses, update bank information, add or subtract the number or qualifying children, etc.
Individuals may benefit from the expanded child tax credit provided under the American Rescue Plan Act of 2021. Taxpayers should evaluate their eligibility carefully and continue to monitor future guidance issued by the IRS.
Spencer Helmick | Tax Staff