The American Rescue Plan Act of 2021, that was passed in March of 2021, provided a temporary expansion of the child tax credit (CTC) for tax year 2021. The IRS is required to make monthly advance payments of the credit to taxpayers from July through December 2021.
Refundable Credit for 2021
This 2021 credit is fully refundable provided either the taxpayer or the spouse has a principal place of abode in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.
In comparison, prior to 2021, the child tax credit of up to $2,000 per Qualifying child, was partially refundable based on a formula and could generate a maximum refundable credit of $1,400.
Note, the Other Dependent Credit (noted below) is not refundable.
Advance Payments of the 2021 Credit
Qualifying for the Credit
To qualify for the credit, a taxpayer must have a qualifying child who is 17 or under as of the end of tax year 2020. A qualifying child:
- Related to the taxpayer in one of the following ways: child, stepchild, foster child, adopted child, step or half-sibling, or a descendant of any of them.
- Is age 17 or under as of the end of tax year 2021. (This is increased from being age 16 or under as of the end of tax year 2020).
- Has a Social Security Number (SSN).
- Has U.S. citizenship, or are U.S. Nationals or resident aliens.
- Did not provide more than half of their own support.
- Lived with the taxpayer for over half the year.
- Did not file a joint return.
Claiming the Credit
The IRS will initially estimate the credit based on the last filed tax return (either 2020 or 2019). Half of the credit is to be sent out in a series of advance installments from July through December 2021. The actual credit amount will be reconciled when the 2021 tax return is filed and any remaining credit will be claimed on the 2021 tax return.
To claim the credit the taxpayer will need to report the names and social security numbers of the qualifying children on the 2021 tax return. If a child does not have a social security number, the taxpayer will not be able to claim the CTC for that child.
Calculating the Credit
The 2021 credit amount is up to $3,000 per qualifying child between 6-17 years of age, or up to $3,600 for a qualifying child under 6 years of age. This has increased from $2,000 per qualifying child for tax year 2020 up to a maximum of 16 years of age.
There are limitations that apply in the calculation of the credit. To follow the various phaseouts the credit needs to be thought of in two parts, the original $2,000 credit per qualifying child, plus the additional $1,000 or $1,600 per qualifying child as expanded for 2021.
The first phase out applies to the additional amount of the credit pertaining to 2021 over the original credit amount. I.e. The additional $1,000 per qualifying child ($3,000 – $2,000), or the additional $1,600 per qualifying child if the child is under age 6 ($3,600 – $2,000).
| Taxpayer Type | AGI Range | Availability of $1,000 or $1,600 Credit per Qualifying Child |
| Individual | Below $75,000 | No phase out |
| Individual | $75,000 – $200,000 | Phased out by $50 for every $1,000 (or part thereof) of the amount over $75,000. |
| Married Filing Joint | Below $150,000 | No phase out |
| Married Filing Joint | $150,000 – $400,000 | Phased out by $50 for every $1,000 (or part thereof) of the amount over $150,000. |
The second part of the phaseout relates to the $2,000 portion of the credit and this phaseout targets high income individuals.
| Taxpayer Type | AGI Range | Availability of original $2,000 Credit amount per Qualifying Child |
| Individual | Below $200,000 | No phase out |
| Individual | Above $200,000 | Phased out by taking the amount AGI exceeds $200,000 (or part thereof) and then multiplying by 5% (0.05). |
| Married Filing Joint | Below $400,000 | No phase out |
| Married Filing Joint | Above $400,000 | Phased out by taking the amount AGI exceeds $400,000 (or part thereof) and then multiplying by 5% (0.05). |
Examples:
1) A taxpayer has a dependent who is 18 and has a SSN.
The dependent is not a qualifying child for purposes of the CTC because they are over age 17.
2) A taxpayer files as single with AGI of $70,000 and has two dependents who are age 10 and 12, both have SSNs and meet the other requirements to be treated as a qualifying child.
The CTC amount is $6,000 ($3,000 + $3,000) The credit is not subject to phaseout because AGI is below $75,000.
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