Recent Tax Updates

Change to Child Tax Credit for Tax Year 2021 under the American Rescue Plan Act of 2021

Due to recent changes in the American Rescue Plan Act of 2021, families may receive an increase in their Child Tax Credit ($3,000 or $3,600 per child) and have 50% of it paid in advance by the IRS.

Currently, the Child Tax Credit is worth $2,000 per individual under the age of 17 whom you claim as a dependent and has a Social Security number.  To qualify, the child must be related to you and generally live with you for at least six months during the year.  The credit begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return.  Up to $1,400 of the child credit is refundable for some lower-income individuals with children, but they must also have earned income of at least $2,500 for the refundable portion to apply.

With new legislation here are the changes to the Child Tax Credit for 2021:

  1. Children under the age of 18 will now qualify
  2. Credit will increase to $3,000 per child ($3,600 per child under age 6) for many families
  3. Removal of the $2,500 earnings floor for the Additional Child Tax Credit
  4. Credit will be fully refundable
  5. Allow half of the credit to be paid in advance by having the IRS send periodic payments to families from July 2021 to December 2021

Phase-Outs for the Child Tax Credit 
Not all families will be eligible for the full higher Child Tax Credit.

The increased Child Tax Credit has two phase-outs for 2021 as follows:

1st Phase-Out – The credit begins to be reduced to $2,000 when AGI reaches the following:

  • Single filers – $75,000
  • Head of household filers – $112,500
  • Married filing joint filers – $150,000

2nd Phase-Out – Remaining $2,000 credit will begin to be reduced to zero when the AGI reaches the following:

  • Married filing joint filers – $400,000
  • All other filing status’ – $200,000

Advance Payment of Child Tax Credit for 2021
The law calls for the IRS to send out payments (mainly in the form of direct deposits) periodically from July through December to all eligible families. These periodic payments would account for half of the family’s 2021 Child Tax Credit. If monthly payments were made, this would result in payments of up to $250 per child ($300 per child under age 6) for six months.

The advance payments will be calculated based on the taxpayer’s 2020 federal return or 2019 return if the 2020 return has not been filed at the time the advance payments begin.

For example:
A family of 5 with three children ages 11, 8, and 5 (assuming the family qualifies for the higher child credit and doesn’t opt out of the advance payments), could get $800 per month from the IRS from July through December, for a total of $4,800.  They would then claim the additional $4,800 in child tax credits when they file their 2021 return next year.

IRS Online Tool for Advance Child Tax Credit
IRS will create an online tool that will allow taxpayers that are eligible to receive the Advance Child Tax Credit to do the following:

  • Opt-out of receiving the advance payments
  • Provide information on changes to:
    • Income
    • Marital status
    • Number of qualifying children

Reconciliation of Advance Payments with Calculated 2021 Child Tax Credit
If the taxpayer receives advance payments of the Child Tax Credit, then these payments must be reconciled with the calculated 2021 Child Tax Credit that will be calculated on the 2021 federal return.

The result of the reconciliation will be one of the following:

  • Refundable credit – Calculated credit is greater than the advance payments received
  • Additional Tax – Advance payments received are greater than calculated credit

Safe Harbor for Excess Advance Payments
For lower income families there is a safe harbor amount of $2,000 per child if the advance payments exceed the calculated credit.

Here is how it works:
Taxpayer does not have to repay an overpayment of up to $2,000 per child (safe harbor amount) as follows:

  • Single – Full safe harbor amount when AGI is below $40,000. Phases out between $40,000 and $80,000.
  • Married filing joint – Full safe harbor amount when AGI is below $60,000. Phases out between $60,000 and $120,000.
  • Head of Household – Full safe harbor amount when AGI is below $50,000. Phases out between $50,000 and $100,000.
Mark Castro, CPA

Mark Castro, CPA

Mark has been with CrossLink Professional Tax Solutions (CPTS) since 2008, but has been in the tax industry since 1990. As the government/tax industry liaison for CPTS, Mark has been very active in working with the IRS, States, and other tax industry members to help improve communications, promote standardization, and simplification of eFile systems. Mark has also been active with industry associations as a board member of the National Association of Computerized Processors (NACTP) and the Council of Electronic Revenue Communication Advancement (CERCA) for many years. These two associations work with the IRS and States to help solve key eFile and electronic tax system issues and work to improve the operations of the State and IRS eFile systems.

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