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Expanded Child Tax Credit

June 28, 2021

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 pay one half of the year’s credit in monthly advance payments, up to $300 per child, to taxpayers from July through December 2021. The remaining half of the credit can be claimed on the taxpayer’s 2021 tax return.

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 the taxpayer 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. Under the new rules for 2021, the entire amount of the child tax credit is fully refundable even if the taxpayer claiming the credit has no tax liability. (See below for how to calculate the total credit).

Note, the Other Dependent Credit (noted below) is not refundable.

Qualifying for the Expanded Child Tax 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. The taxpayer and spouse do not need to be employed to claim the child tax credit for 2021. This is different from prior rules, which required the taxpayer or spouse to have at least $2,500 of earned income to qualify for the credit.

A qualifying child:

  • Related to the taxpayer in one of the following ways: child, stepchild, foster child, adopted child, brother, sister, 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 U.S. 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.
  • Must be claimed as a dependent on the taxpayer’s return.

Other Dependent Credit

If a child is not a qualifying child for purposes of the Child Tax Credit, they may still be eligible for the Other Dependent Child (ODC) Credit. This credit is up to $500 for dependents who do not qualify for the CTC. Note a taxpayer cannot claim this credit for a dependent who qualifies for the child tax credit.

To qualify for the ODC Credit. An Other Dependent:

  • Must be a dependent claimed on the taxpayer’s tax return.
  • Dependents can be age 17 or older.
  • Dependent parents or other qualifying relatives supported by the taxpayer can qualify.
  • Have either a SSN or an Individual Identification Taxpayer Number (ITIN) or Adoption Identification Number (AIN)
  • Has U.S. citizenship, or are U.S. Nationals or U.S. resident aliens.

Claiming the Expanded Child Tax 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 then.

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 Expanded Child Tax Credit for that child, but might still be eligible to claim the $500 credit for that child using an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).

For those that are not required to file a tax return, information is required to be submitted using the link below to register to receive the Expanded Child Tax Credit.

https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool

For frequently asked questions regarding claiming the credit see the IRS link below:

https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-f-updating-your-child-tax-credit-information-during-2021

Will Overpayments have to be paid back?

Since payments of the child tax credit are being sent out in advance of the filing of the 2021 tax return, from which the credit will ultimately be reconciled to, it is possible some families will receive more payments than they are allowed to claim and may have to repay the excess amount on their 2021 tax return.

The American Rescue Plan provides a safe harbor for low to moderate income taxpayers, who may mistakenly be paid more than the credit amount they are eligible.

Category of FilerAGI RangeExcess Payments Required to be Paid Back?
Single or Married Filing SeparateBelow $40,000No
Single or Married Filing Separate$40,000 – $80,000Partial Repayment Required
Single or Married Filing SeparateAbove $80,000Required to repay the entire amount of any overpayment
Head of HouseholdBelow $50,000No
Head of Household$50,000 – $100,000Partial Repayment Required
Head of HouseholdAbove $100,000Required to repay the entire amount of any overpayment
Married Filing Joint or Qualified WidowBelow $60,000No
Married Filing Joint or Qualified Widow$60,000 – $120,000Partial Repayment Required
Married Filing Joint or Qualified WidowAbove $120,000Required to repay the entire amount of any overpayment

How to Unenroll from receiving Advance Payments

If a taxpayer believes they will be in a situation where they will be required to pay back the advance payments of the credit, and they would prefer to unenroll from receiving the advance payments up front, they can use the IRS portal to unenroll themselves from receiving the advance payments. To unenroll from receiving advance payments click here to get to the IRS portal link. This portal link can also be used to update the direct deposit information or make other reporting changes related to the number of dependents expected to be claimed on the 2021 tax return.

Who Claims the Credit if Parents Alternate Claiming a Dependent

If two parents alternate claiming a dependent child on their tax return, the parent that is ultimately entitled to the full credit amount is the parent that will claim the child on their 2021 tax return.

Since the IRS sends out advance payments based on the last filed tax return, if both parents have filed their 2020 return, the parent set up in the IRS system to receive advance payments might not be the parent who will be eligible for the credit.

The parent who is eligible for the credit can opt to use the IRS portal to enroll themselves in the advance payment program, or they can wait to claim the credit when they file their 2021 tax return.

The parent that might have been automatically set up to receive advance payments of the credit, may want to use the IRS portal to unenroll themselves from the program. If this parent doesn’t unenroll themselves from the program and their income is over the AGI thresholds noted above, they will potentially have to pay back all or part of the amount they received.

The eligible parent will not be impacted by any amounts received by the ineligible parent, even if the parent who erroneously received advance payments wasn’t required to pay it back because their AGI was below the threshold.

Calculating the Expanded Child Tax Credit

The 2021 credit amount is up to $3,000 per qualifying child between 6-17 years of age, and up to $3,600 for a qualifying child under 6 years of age at the end of 2021. 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. 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.

This first table below addresses the phase out ranges for the various taxpayer types for the $1,000 or $1,600 portion of the credit.

Taxpayer TypeModified AGI RangeAvailability of $1,000 or $1,600 Credit per Qualifying Child
Single or Married Filing SeparateBelow $75,000No phase out
Single or Married Filing Separate$75,000 – $200,000Phased out by $50 for every $1,000 (or part thereof) of the amount over $75,000).
   
Head of HouseholdBelow $112,500No Phase out
Head of Household$112,500 – $240,000Phased out by $50 for every $1,000 (or part thereof) of the amount over $112,500
   
Married Filing Joint or Qualified WidowBelow $150,000No Phase out
Married Filing Joint or Qualified Widow$150,000 – $400,000Phased out by $50 for every $1,000 (or part thereof) of the amount over $150,000

Additional phaseout that targets high income individuals. This second table below addresses the phase out ranges for the various taxpayer types for the $2,000 portion of the credit.

Taxpayer TypeModified AGI Range:Availability of original $2,000 Credit per Qualifying Child
Single, Married Filing Separate, Head of Household and Qualified WidowBelow $200,000No phase out
Single, Married Filing Separate, Head of Household and Qualified WidowAbove $200,000Phased out by taking the amount AGI exceeds $200,000 and rounding up to the next $1,000 and then multiplying by 5% (0.05)
Married Filing JointBelow $400,000No phase out
Married Filing JointAbove $400,000Phased out by taking the amount AGI exceeds $400,000 and rounding up to the next $1,000 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 he is over 17.

The dependent is eligible for the ODC of up to $500.

  • 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 children.

The CTC amount is $6,000  ($3,000 + $3,000 = $6,000)

The credit is not subject to phase out because AGI is below $75,000.

  • A taxpayer files as single with AGI of $100,000 and has two dependents who are age 10 and 12, both have SSNs and meet the other requirements to be treated as a qualifying children.

The CTC amount is initially calculated as $6,000  ($3,000 + $3,000 = $6,000

The maximum credit is then subject to phase out $6,000 – $1,250 = $4,750

($100,000 – $75,000 = $25,000   $25,000 / $1,000 = 25    25 x $50 = $1,250 phase out amount).

  • A taxpayer files as single with AGI of $200,000 and has two dependents who are age 10 and 12, both have SSNs and meet the other requirements to be treated as a qualifying children.

The CTC amount is initially calculated as $6,000  ($3,000 + $3,000 = $6,000

The additional 2021 portion of the credit $2,000 ($1,000 + $1,000) is fully phased out.

$200,000 – $75,000 = $125,000   $125,000/$1,000 = 125    125*50 = $6,250 which is more than the credit.

The original 2020 portion of the credit $4,000 ($2,000 + $2,000) is not subject to phase out because AGI is not over $200,000 (for a single filer).

Therefore the credit is $4,000

  • A taxpayer files as single with AGI of $220,000 and has two dependents who are age 10 and 12, both have SSNs and meet the other requirements to be treated as a qualifying children.

The CTC amount is initially calculated as $6,000

Remember to break this out ($2,000 + $1,000) + ($2,000 + $1,000)

The maximum credit is then subject to phase out as follows:

The additional 2021 portion of the credit $2,000 ($1,000 + $1,000) is fully phased out.

$220,000 – $75,000 = $145,000   $145,000/$1,000 = 145    145*50 = $7,250 which is more than the credit.

The original 2020 portion of the credit $4,000 ($2,000 + $2,000) is then subject to phase out $4,000 – $1,000 = $3,000

($220,000 – $200,000 = $20,000    $20,000 * 0.05 = $1,000)

The total credit is $3,000