The Child Tax Credit:
Important Changes to the Tax Laws

Changes to the Child Tax Credit

Do you have kids? Are you wondering about the changes to the Child and the American Rescue Plan Act of 2021? We have answers!

There is a lot of important information below to share with you regarding recent legislative changes.

You may have recently received a notice from the IRS explaining your eligibility for advance payments of the Child Tax Credit, and we wanted to offer some explanations and options for you to consider. If you do not have dependents who will be age 17 or under as of December 31, 2021, you can stop reading and disregard.

First, some background for you… For the 2021 tax year only, the American Rescue Plan Act of 2021 (ARPA) makes big, taxpayer-friendly changes to the federal income tax Child Tax Credit (CTC).

Child Tax Credit Basics:

1. 1.  For 2018-2020 and 2022-2025, the maximum annual CTC is $2,000 per qualifying child.
   2.  A qualifying child is an under-age-17 child who could be claimed as your dependent for the year. Basically, that means the child lived with you for over half the year; did not provide more than half of his or her own support; and is a U.S. citizen, U.S. national, or U.S. resident.
   3.  The maximum $2,000 CTC is phased out (reduced) if your modified adjusted gross income (MAGI) for the year exceeds $200,000, or $400,000 for a married joint-filing couple. The credit is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.
   4.  For 2018-2020 and 2022-2025, the CTC is partially refundable.
   5.  You can collect the refundable amount even if you have no federal income tax liability for the year. So, the refundable amount is free money.
   6.  The refundable amount generally equals 15 percent of your earned income above $2,500.
   7.  An alternative formula for determining the refundable amount applies if you have three or more qualifying children. In any case, the maximum refundable amount for 2018-2020 and 2022-2025 is limited to $1,400 per qualifying child.

More Generous Child Tax Credit Rules for 2021:

1. 1. For your 2021 tax year only, ARPA makes the following taxpayer-friendly changes.
   2. Qualifying children can be up to 17 years old
   3. The definition of a qualifying child is broadened to include children who are age 17 or younger as of December 31, 2021.
   4. Bigger maximum CTC with separate phase out rule for the increase
      • ARPA increased the maximum CTC to $3,000 per qualifying child, or $3,600 for a qualifying child who is age 5 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 joint-filing couples with MAGI above $150,000. The increased amount is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.
      • The “regular” $2,000 CTC amount is subject to the “regular” phaseout rule explained earlier.

Important

If you’re 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.

1. 1. It is key to know that 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 joint-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 is stationed outside the U.S. while serving on extended active duty, you’re 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.
   2. IRS will make advance CTC payments

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).

Options and Additional Information about

Child Tax Credits :

The advance payments on the CTC is just that – an advance. If you elect to receive the advance payments, please understand that the credit when you file your 2021 tax return will be reduced by the amount received throughout the year, effectively creating more tax for you come April. If you do indeed elect to receive the advance payments, we ask that you please track these advance payments carefully, as they will need to be reported accurately when your tax return is filed in early 2022. Learning from the experience of reporting stimulus payments received in 2020/21 on your 2020 tax return, it will be very important to keep careful track of these payments.

If you would like to elect NOT to receive the advance payments, you can go to www.irs.gov/childtaxcredit2021 for more information and to unenroll from the payments. Also, if your information has changed since your 2020 tax return was filed (marital status, bank account, etc.), please continue to monitor that site for more information, as the IRS has not yet provided guidance as to how to update that information at this point in time.

-Bryan and Team

Bryan Lichau, CPA
President, Osprey Accounting Services, Inc.
(253) 838-6708 office