The American Rescue Plan Act of 2021 (ARPA) expands the child tax credit, for 2021 only.  This credit provides some unique planning opportunities, among them the potential to receive some of these credits as an advance payment starting in July.  Here are some highlights of the new law. 

• For children age 6-17, expands the credit from $2,000 to $3,000 per child (note, also expanding the top age from 16 to 17).
• For children age 0-5, expands the credit from $2,000 to $3,600 per child.
• Makes the credit fully refundable.  For 2021 there is no additional child tax credit phase-in based on earned income or a cap.  The full amount is refundable, even with little to no earned income. 
• The expanded portion of the credit phases out at a rate of 5% above certain income levels:
  • $75,000 single
  • $112,500 head of household
  • $150,000 married filing joint
  • The reduction amount plateaus at the old child tax credit amount ($2,000 per child) until the current law thresholds for phaseout are met ($200,000 single/$400,000 married filing jointly). 
• The IRS will begin sending ½ of the estimated credit to families in monthly installments beginning July 2021. This will be estimated based off 2020 income tax data or, if unavailable, 2019.
• Taxpayers will then claim the remaining ½ as a credit on their 2021 tax return.
• You can check your eligibility for the child tax credit advance payments here.
• Excess advance payments may need to be repaid if income is above certain thresholds.
  • Repayment will occur in part between $40,000-80,000 for single filers, and in full above $80,000.
  • Repayment will occur in part between $50,000-100,000 for head of household filers, and in full above $100,000.
  • Repayment will occur in part between $60,000-120,000 for married filers, and in full above $120,000.
• Taxpayers who are not required to file a return in 2019 or 2020, but otherwise have qualifying children, can sign up using the “Child Tax Credit Non-Filer Sign-up Tool”.
• The IRS gives any taxpayer the opportunity to opt out of these advance payments.  If you opt out, you will claim the full amount of the credit you are entitled to on your 2021 tax return.  You can opt out here.  Reasons to opt out may include:  
  • Change in marital status.
  • Change in number of dependents claimed.
  • Change in income; specifically, an expected increase in income that might trigger phaseout reductions of the expanded child tax credit amounts. 
  • A preference for one large payment with your return instead of monthly payments.  This may be especially true for taxpayers who use the credit to help reduce overall tax liability.  

This is a general overview.  As always, if you have specific questions, please don’t hesitate to reach out to our office and we can help analyze how these changes will impact your specific situation.