The Child Tax Credit has existed in many forms over the last 20 years, but the changes implemented by the American Rescue Plan Act of 2021 have expanded the program significantly. It is estimated that more than 93% of children, ~69 million, will receive benefits under the new plan. The new credit will not impact all families equally and currently only applies to the 2021 tax year.
In 2020, each child under the age of 17 claimed as a dependent on a parent’s return could qualify for a credit of up to $2,000. This credit was implemented under the Tax Cuts and Jobs Act of 2017. The credit is phased out when adjusted gross income (AGI) is above $400,000 for joint filers or $200,000 for single/head-of-household filers. This base credit still exists.
For 2021, an enhanced credit of $1,600 per child under the age of 6 and $1,000 per child aged 6-17 has been implemented, with some limitations. Ages of children are determined as of December 31, 2021. The enhanced benefit is reduced by $50 for each $1,000 of AGI above: $75,000 for single filers, $112,500 for head-of-households and $150,000 for joint filers.
In addition to providing an expanded child tax credit, the 2021 Act also directed the IRS to send advanced payments of half the credit directly to families starting in July of 2021. The idea is for half of the credit to be paid over the last six months of 2021 – with the balance paid when taxes are filed for 2021.
To help illustrate these credits, we will talk about the Jones family. Bob and Sally Jones are a married couple with 3 children: Billy (age 12), Sam (age 7), and Judy (age 4). Bob and Sally file a joint return and have an AGI of $150,000 in 2021. They will fully qualify for the enhanced benefit, receiving $9,600 worth of credits for 2021 – $800 per month from July to December and the balance of $4,800 when they file their 2021 return.
If Sally earns an extra $10,000 in 2021, the Jones family’s AGI increases to $160,000, $10,000 over the phase-out threshold of $150,000 for joint filers. Their enhanced credit is reduced by $500 ($50 x 10), and they will receive $9,100 worth of credits for 2021 – ~$758 per month from July to December and the balance of $4,550 when they file their 2021 return.
If Bob gets a big promotion in 2021, the Jones family’s AGI will be $415,000. Given their jump in income, they no longer qualify for the enhanced benefits. Additionally, because their AGI is now $15,000 above the second phase-out, $400,000 for joint filers, their $6,000 base credit ($2,000 per child) is reduced as well, by 5% of AGI above the threshold or $750. The Jones family will receive $5,250 worth of credits for 2021 – ~$438 per month from July to December and the balance of $2,625 when they file their 2021 return.
The American Rescue Plan instructs the IRS to create an online portal so that families can update their income, marital status, and number of children on an ongoing basis. Additionally, this portal should allow families to opt out of monthly payments if they so choose. The six monthly payments are an ideal outlined in the Act, but there is some question as to whether the IRS will be able to implement the program as envisioned. Flexibility was built in so that the IRS may reduce the number or timing of payments as it sees fit.