American Rescue Plan Act of 2021 Temporarily Expands Child Tax Credit for 2021 Tax Year

The American Rescue Plan Act of 2021 has provided enhancements to the child tax credit, meant to temporarily expand the eligibility for, and the amount of, the credit for the 2021 tax year. Additionally, the enhancements require the IRS to make monthly advanced payments of the credits to taxpayers from July 2021 through December 2021. These payments, in total, equal 50% of the IRS’s estimate of an eligible taxpayer’s 2021 child tax credits. To determine payments, the IRS will look at your 2020 tax return, or your 2019 return if you have not yet filed for 2020.

Previously, the credit was $2,000 for qualifying child, which is defined as a child under the age of 17 who could be claimed as a dependent. The $2,000 credit was phased out if your modified adjusted gross income was over $200,000 if you file as an individual or $400,000 if you file jointly. Under the American Rescue Plan Act of 2021, the definition of a qualifying child has been expanded to include 17-year-olds who will not turn 18 by the end of 2021. Additionally, the credit has been increased to $3,000 per child for children over the age of 6 and $3,600 for children under age 6. Single filers making over $75,000 and joint filers making $150,000 are now phased out of the credit.

If you are not eligible to claim the increased child tax credit in 2021, you can still claim the regular $2,000 credit, subject to the previously existing phase-out rules. The credit is fully refundable for 2021 for taxpayers with a principal place of residence in the United States for more than half of the tax year. The phase out rules apply regardless of refundability. It is also important to note that the $500 family credit for dependents other than qualifying children remains nonrefundable.

These changes make the child tax credit more valuable and expand availability to more taxpayers in 2021. Our team is staying up-to-date on the latest updates in real time, and we are committed to keeping our clients informed. If you have any questions about the updates to the child tax credit for 2021, please do not hesitate to reach out.