Understanding the 2021 Changes to the Child Tax Credit

Taxpayers who have children in their care should be aware that the Child Tax Credit has been changed for one year, effective for 2021. Here’s a review of the changes to the previous Child Tax Credit laws:

Prior to 2021 In 2021
Children under age 17 at the end of the tax year are eligible for the credit Children who are age 17 at the end of the tax year are now also eligible for the credit
$2,000 credit for each child under 17 $3,000 credit for each child ages 6 to 17

$3,600 credit for each child under age 5

Up to $1,400 of the credit is refundable if certain income requirements are met The entire tax credit is refundable as long as the taxpayer or spouse on a joint return has a principal place of abode in the US for over half of the year*
Income thresholds are $200,000 in AGI (modified adjusted gross income) for all taxpayers and $400,000 for joint filers Income thresholds are $75,000 in modified AGI for single filers, $112,500 for heads-of-household, and $150,000 for joint filers
A phaseout rule applies where the credit is reduced by $50 for each $1,000 of modified AGI that exceeds the income thresholds The additional credit ($1,000 or $1,600 depending on the child’s age) is also reduced by $50 for each $1,000 of modified AGI over the income thresholds

*Note: US citizens living abroad can still get the $1,400 credit if they meet the earned income requirements under the current rules. 

Another important update is that Congress plans to provide advanced payments of the Child Tax Credit: 50% of the anticipated 2021 credit will be advanced in equal payments between July and December of this year. Congress will determine the anticipated credit using the taxpayer’s filing status, modified AGI, and number of qualifying children from 2020 tax returns (or 2019 if 2020 is not filed). If later on the taxpayer files a 2020 tax return that shows different data, the IRS is able adjust the advances accordingly.

The new law requires the IRS to create an online portal that will allow taxpayers to 1) opt out of the advanced payments and 2) provide updated information to better anticipate the actual credit the taxpayer should receive in 2021. The IRS will send a notice to every taxpayer who receives advance payments, so they will know how to reconcile it on their 2021 tax return.

Here’s a practical example: Daniel is the head of household and has an AGI of $115,000 in the 2020 and 2021 tax years. He had a 3-year-old son at the end of 2020. For 2020, his tax credit would be $2,000.

However, for 2021, Daniel’s income is over the new threshold, so he will only receive $3,450 of the enhanced credit (remember that the credit is reduced by $50 for each $1,000 over the threshold).

Now, if Daniel did not opt out of the advanced payments, he would see 50% of that $3,450 credit paid to him in six monthly installments from July through December. Daniel would then claim the remainder of the credit on Form 1040. So on his 2021 return, Daniel would claim $1725 (half of his enhanced credit).

In summary: Taxpayers who are eligible for the Child Tax Credit and decide to receive the advance payments need to anticipate that the amount of credit applied to their return will be less, which could affect their refund or liability amount.

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