Here’s How the Expanded Child Tax Credit Works for 2021
On March 6th, the Senate voted to pass the 1.9 trillion stimulus plan which includes provisions to make the Child Tax Credit (CTC) available to more families. Millions of American Families could receive advance payments of this credit as early as July. Up to half of the credit could be paid in monthly installments of $250-$300 for each qualifying child. Democrats hope to make these changes permanent in separate legislation. Here we provide an overview of the 2020 CTC and discuss the expansion of the CTC for 2021.
How does the child tax credit work for 2020 filings?
The Child Tax Credit helps relieve the tax burden for families with children. For the 2020 tax year, parents can claim a $2,000 credit for each qualifying child under the age of 17. The credit phases out for single taxpayers making more than $200,000 ($400,000 if married filing joint).
As with other tax credits, it reduces your tax bill dollar for dollar. If the Child Tax Credit exceeds the amount of income tax owed the taxpayer can obtain a refund by claiming the Additional Child Tax Credit. The refundable amount is 15% of the excess earned income amount over $2,500, up to $1,400 per qualifying child. The Consolidation Appropriations Act provides a measure for the 2020 tax year that allows taxpayers to use their 2019 or 2020 income to figure out their Additional Child Tax Credit.
How does the new bill expand the Child Tax Credit in 2021?
The new bill, known as the American Rescue Plan, includes the following changes to this tax credit for tax year 2021:
1. It increases the credit amount. It increases the credit amount from $2,000 to $3,000 for children 6- 17. The credit is increased to $3,600 for children less than 6 years old.
2. It eliminates refund limitations and provides advanced payments of credit. It makes the entire credit refundable, meaning parents will receive a refund for any portion not used to offset federal income tax liability. Under the new bill, the tax credit will be paid in advance. The IRS may begin advanced payments in July on a monthly basis if feasible.
- $3,000 tax credit could be paid in $250 monthly installments
- $3,600 tax credit could be paid in $300 monthly installments
3. It lowers the adjusted gross income limits. For 2020, the credit amount is reduced by $50 for each $1000 of a taxpayer’s AGI exceeds the income limit. This rule makes high-income earners ineligible for the CTC. The income limit for Married Filing Jointly was $400,00 and for all other filers, it was up to $200,000.
Under the new bill the 2021 CTC will be phased out for taxpayers who exceed the following threshold amounts:
- $150,000 for joint filers
- $112,500 for head of household filers
- $ 75,000 for all other filers
4. It eliminates the earned income requirement. For 2020, the taxpayer must have more than $2,500 of earned income. Examples of earned income include wages, salary, tips, and self-employment. The 2021 CTC does not require earned income to qualify.
5. It increases the age limit for a qualifying child. The CTC for 2020 is for children 0-16. The 2021 CTC increases the age limit of children to 17. Additionally, each dependent child claimed for CTC must:
- have a valid Social Security Number
- be related to the taxpayer; son, daughter, stepchild, adopted child, foster child, sibling, or grandchild
- be claimed as a dependent on the taxpayer’s return
- live with the taxpayer more than half of the year in the U.S.
- not provide more than half of their own financial support
- be a U.S. citizen. U.S. national, or U.S. Citizen
Additional Tax Breaks for Families
Credit for Other Dependents
Taxpayers with dependents who don’t qualify for the child tax credit may claim the credit for other dependents. The maximum credit amount is $500. To take the credit, your dependent must meet certain conditions.
For example, the dependent you claim must be age 17 or older and have an individual taxpayer identification number. Other dependents also include dependent parents or other qualifying relatives supported by the taxpayer and dependents living with the taxpayer who aren’t related to the taxpayer.
Here are some additional facts about the credit for other dependents:
- The credit begins to phase out when the taxpayer’s income is more than $200,000 ($400,000 for married couples filing a joint tax return).
- Taxpayers can claim the credit for other dependents in addition to the child and dependent care credit and the earned income credit.
- The dependent must be a U.S. citizen, national or resident alien.
- A taxpayer can claim this credit if they claim the person as a dependent on the taxpayer’s return.
- The dependent cannot be used to claim the child tax credit or additional child tax credit.
Child and Dependent Care Credit (CDCTC)
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. The credit percentage is reduced for higher-income earners, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.
Changes to Child and Dependent Care Credit
The new bill would expand the Child and Dependent Care Credit and make it fully refundable to families making less than $125,000. The credit would be increased to cover up to 50 percent of qualifying childcare expenses up to $4,000 for one child and $8,000 for two or more children for 2021.