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For the 2021 tax year only, the American Rescue Plan Act of 2021 (ARPA) makes major, taxpayer-friendly changes to the federal income tax child credit (CTC).
Here is what you need to know, starting with some necessary background information.
For 2018-2020 and 2022-2025, the maximum annual child tax credit (CTC) is $2,000 per qualifying child.
More Generous CTC Rules for 2021
For your 2021 tax year only, ARPA makes the following taxpayer-friendly changes.
- Qualifying children can be up to 17 years old
- The definition of a qualifying child has been broadened to include children who are age 17 or younger as of December 31, 2021.
Bigger Maximum CTC with Separate Phaseout Rule for the Increase.
The ARPA increased the maximum child tax credit (CTC) to $3,000 per qualifying child, or $3,600 for a qualifying child who is five years or younger as of December 31, 2021. But the increased 2021 credit amounts are subject to two phaseout rules:
- The increased CTC amount—$1,000 or $1,600, whichever applies—is phased out for single taxpayers with MAGI above $75,000, for heads of household with MAGI above $112,500, and for married jointly filing couples with MAGI above $150,000. The increased amount is phases out by $50 per $1,000 (or a fraction of $1,000) of MAGI in addition to the applicable phaseout threshold.
- The “regular” $2,000 CTC amount is subject to the “regular” phaseout rule explained earlier.
Key point: If you are not eligible for the increased CTC amount for 2021 because your income is too high, you can still claim the regular CTC of up to $2,000, subject to the regular phaseout rule.
CTC Is Fully Refundable for Most Folks
For the 2021 tax year, the CTC is fully refundable if you (or, if married, you and your jointly filing spouse) have a principal residence in the U.S. for more than half the year. If you are a member of the U.S. Armed Forces who are stationed outside the U.S. while serving on extended active duty, you are treated as having a principal residence in the U.S.
For 2021, the CTC is fully refundable even if you have no earned income for the year. The MAGI phaseout rules explained earlier apply in calculating your allowable, fully refundable CTC for 2021.
IRS Will Make Advance CTC Payments (We Hope)
Another ARPA provision directs the IRS to establish a program to make monthly advance payments of CTCs (generally via direct deposits).
Such advance payments will equal 50 percent of the IRS’s estimate of your allowable CTC for 2021. The advance payments will be made in the form of equal monthly installments from July through December 2021. To estimate your advance CTC payments, the IRS will look at the information shown on your 2020 Form 1040 (or on your 2019 return if you have not yet filed your 2020 return).
For more specialized tax tips tailored to you and more, contact us at Palma Financial. With over 20 years of experience, we have the knowledge and expertise to guide you in all parts of your financial journey. Contact us by phone or online or schedule your initial consultation here. We look forward to serving you!