Child Tax Credit: Updates Under the American Rescue Plan
By Aurora Eager Leavitt, CPA, Staff Accountant, Tax & Business Services
In March 2021, updates to the Child Tax Credit were implemented as part of the American Rescue Plan (ARP). In response to the COVID-19 pandemic, these latest changes aid taxpayers meeting certain income thresholds by expanding the amount of the credit and by allowing the credit to be paid out in advance for the remainder of 2021.
The Taxpayer Relief Act of 1997 introduced the Child Tax Credit, implementing a $400 credit per child under age 17. It was designed to provide relief to middle and upper-middle class income families. Over the last 24 years the credit has remained in place with changes to the income threshold and the amount families would receive per child.
In 2017, the Tax Cuts and Jobs Act (TCJA) increased the credit to $2,000 per eligible child for single filers earning up to $200,000 and married filers earning up to $400,000. The credit decreases by 5% of adjusted gross income (AGI) over the threshold amounts. Up to $1,400 of this credit was refundable. However, the refundable portion was limited to 15% of earnings above $2,500, reducing the amount low-income earners could receive as a refundable credit.
With the passage of the ARP in March this year, the credit was temporarily expanded to $3,600 for children under age 6 and $3,000 for children between the ages of 6 and 17. There is no cap on the total amount someone with multiple children can claim, and the credit is completely refundable. The credit begins to phase out as certain income levels are attained.
Under the American Rescue Plan, the credit is available to be paid out in advance for the remainder 2021. The IRS began issuing advance monthly installments on July 15. Non-Filers can visit https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021 to enter their information to receive these payments.
Eligible taxpayers should remember these are ADVANCED payments of a credit they are already receiving and not ADDITIONAL payments. For example, if a taxpayer had a $5,000 dollar tax liability in 2020 after all payments and other credits, and was eligible for the full $2,000 child tax credit, the total tax obligation to the IRS would have been $3,000. This year, if the same taxpayer has the same $5,000 liability and has one child over 6 and under 17, they will now receive a $3,000 child tax credit. The taxpayer will receive half of the credit between July and December.
Another situation that could cause an additional liability due in April is if the taxpayer’s AGI increased in 2021, placing them into the phase-out range. The credits are being advanced based on 2020 income, so the taxpayer would receive advanced payments based on a $3,000 credit. When they file their tax return, the credit will be calculated based 2021 AGI. Since this taxpayer is now in a phase-out range, they will not be not eligible for the full $3,000 credit, and the excess advanced credit they received will also be due to be returned in April.
The advanced payment of the Child Tax Credit in 2021 will be helpful to many Americans, but taxpayers should be aware of the effect it may have on their tax bills at the end of the year, especially if they typically owe additional tax payments. Please contact your Marcum tax professional for information or assistance.