The American Rescue Plan Act of 2021 significantly increases the Child Tax Credit (CTC) for one year to help families impacted by the pandemic. Millions of eligible families will receive a CTC of $3,000 to $3,600 for each child. Additionally, half of the credit will be paid in advance. On July 15th, the IRS will begin to distribute monthly payments that will continue to the end of the year.
How did the American Rescue Plan change the child tax credit?
The American Rescue Plan Act of 2021 revised the Child Tax Credit for tax year 2021 to include the following changes:
- Increased Credit Amount. It increased the amount of the Child Tax Credit from $2,000 to $3,600 for children under age 6, and to $3,000 for children 6-17 years-old.
- Increased Age Limit. It increases the age limit for a qualifying child. The 2021 CTC increases the age limit of children to 17. In 2020 the age limit was 16.
- Makes Credit Refundable. It makes the entire credit fully refundable, meaning parents will receive a refund for any portion not used to offset federal income tax liability.
- New Advance Payments. Eligible individuals will receive advance payments of the credit. Up to half of the credit could be paid in monthly installments. The IRS will distribute monthly payment from July to December 2021.
- Credit is Extended to Puerto Rico and U.S. Territories. Families residing in Puerto Rico and the U.S. Territories will receive the child tax credit for the first time. However, these families are not eligible for advance child credit payments.
Who is eligible for the 2021 child tax credit?
Families can claim the full child tax credit of up to $3,600 for each child dependent under age 6 ($3,000 for children ages 5-17) as long as they meet income requirements. The American Rescue Plan Act of 2021(ARPA) lowers the adjusted gross income threshold for the Child Tax Credit in 2021. Under the new bill, the 2021 child tax credit will begin to phase out for taxpayers who exceed the following threshold amounts outlined below:
- AGI of $150,000 for married filing joint filers
- AGI of $112,500 for head of household filers
- AGI of $75,000 for single filers
Each dependent child claimed for CTC must meet IRS required tests:
- Relationship Test. The child must be related to the taxpayer; son, daughter, stepchild, adopted child, foster child, sibling, or grandchild.
- Dependency test. The child must be claimed as a dependent on the taxpayer’s return.
- Support Test. The child must not provide more than half of their own financial support.
- Citizen and Resident Test. The child must be a U.S. citizen. U.S. national, or U.S. Citizen. The child must also have a valid Social Security Number
- Additionally, the child must live with the taxpayer more than half of the year in the U.S.
In prior years, families with at least $2,500 of earned income could only claim up to $2,000 child credit for children under age 17. The credit phased out for married filing jointly filers making more than $400,000 and for single filers making more than $200,000; for each $1000 of a taxpayer’s AGI exceeds the income limit the credit amount was reduced by $50. If the Child Tax Credit exceeded the amount of income tax owed the taxpayer could only obtain a refund by claiming the Additional Child Tax Credit. The refundable amount was 15% of the excess earned income amount over $2,500, or up to $1,400 per qualifying child.
How will the advance payments be delivered?
The payments will be made by check, debit cards, or direct deposit. Eligible families will receive up to half of the credit in monthly installments from July to December 2020. The other half of the credit will be claimed when filing their 2021 income tax return.
When will I receive the child tax credit payment?
On May 17th, the IRS announced that the first child tax credit payment will be made on July 15th. They also stated that all monthly payments will be made on the 15th of each month unless the 15th falls on a holiday or weekend. There will be a total of six-monthly advance payments in 2021 for half of the credit. The other half of the credit can be claimed in 2022 when the 2021 tax return is filed.
How much is each monthly payment amount?
The monthly advance child tax credit payment will be calculated using adjusted gross income from 2020 income tax returns, if unavailable the IRS will use 2019 income tax information. Non-Filers can also claim advanced payment by registering with the IRS. The maximum monthly payment amount will depend on the child’s age:
- $300 max. monthly payment will be made for each child ages 0-5 years old.
- $250 max. monthly payment will be made for each child ages 6-17 years old.
2021 Child Tax Credit Payments
|Payment Date||Maximum Payment Amount for each dependent child ages 0-5||Maximum Payment Amount for each dependent child ages 6-17|
|April 2022 second half of payment||$1,800||$1,500|
Can I opt-out of receiving advance payments?
Yes, families can opt-out of receiving advance monthly installments of the 2021 child tax credit. If you opt-out of receiving the monthly payments, you can claim the full credit when filing your 2021 tax return in the 2022 tax season. Some families may want to opt-out because:
- they want to receive a lump-sum payment in 2022
- they may be concerned about receiving overpayment and do not want to deal with having to pay that money back to the IRS next year (additional guidance is expected regarding safe harbor rules that would shield low-income families from repayment).
What is the IRS online child tax credit portal?
The IRS will open two portals to facilitate the process for 39 million eligible families receiving monthly child tax credit advance payments. These portals may be available as early as July 1. Portals will allow families to do the following:
- Register if they do not normally file tax returns
- Update information about changes in their income, filing status, or number of qualifying children.
- Opt-out of monthly payments
Other Credits for Children and Dependents
Credit for Other Dependents (ODC). If you have dependents that don’t qualify for the Child Tax Credit you may claim the Credit for Other Dependents (ODC). The maximum credit amount is $500. The following individuals qualify:
- dependent must be age 17 or older
- dependent must have an individual taxpayer identification number.
- dependent parents or other qualifying relatives supported by the taxpayer
- dependent living with the taxpayer who isn’t related to the taxpayer.
Child and Dependent Care Credit (CDCTC). This federal tax credit allows families to claim expenses related to child or dependent care. You can claim this credit 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.
The American Rescue Plan has temporarily expanded the child and dependent care credit for 2021. Under the new law, you can claim 50% of qualifying expenses. The maximum amount of qualifying expenses has been raised to $8,000 for one qualifying child/dependent and $16,000 for two or more qualifying dependents. The credit is also fully refundable for the current tax year.
- credit up to $4,000 (50% of $8,000) for one qualifying dependent
- credit up to $8,000 (50% of $16,000) for two or more qualifying dependents
The credit begins to decrease for households whose income exceeds $125,000 – and the rate is reduced to 20 percent for households whose income is $183,000 to$400,00.
State Credits. States may also offer state level child tax credits. Click here to view a state by state guide.