In March, Congress passed the American Rescue Plan Act (ARPA) of 2021. This act expanded the amount of, and eligibility for, the Child Tax Credit (CTC) for 2021 and made it a fully refundable credit. It also required advanced payment of the credit unless taxpayers specifically opt out.
Under prior law, the CTC was $2,000 per child and included children under age 17. The credit was phased-out beginning with AGI of $200,000 single / $400,000 married filing joint. The credit was partially refundable.
Under ARPA, the credit is $3,000 per child ($3,600 for children under age 6 at year-end) and the age for qualifying children has been expanded to include 17 year-olds.
There are two sets of phase-out rules:
- The increased amount of the CTC credit over the prior amount ($1,000 or $1,600) is phased out beginning at AGI of $75,000 single, $112,500 head-of-household, and $150,000 married filing joint.
- The remaining $2,000 is then subject to the phase-out rules under the prior law ($200,000 single / $400,000 married filing joint).
The IRS has been instructed to make advance payments of the credit from July to December 2021 in monthly installments of one-twelfth of the annual estimated amount of the credit. The IRS estimate will be based on the taxpayers’ most recently filed tax return (2020 or 2019). Importantly, the credit will need to be reconciled on the taxpayers’ 2021 tax return and any amount received over the actual amount allowed will be an increase to tax.
The IRS will set up an online portal by July 1, 2021, in which taxpayers can opt-out of the advance payments or provide information that would aid the IRS in estimating the amount of the credit for 2021. Taxpayers who opt-out of the advance payments will receive the full amount of the credit when they file their 2021 tax return.
Please remember if you have dependents and you do/do not receive the credit advance, you will need to report to us the amount received/not received each month so it can be reported on your 2021 return.