March 11, 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:
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:
2nd Phase-Out – Remaining $2,000 credit will begin to be reduced to zero when the AGI reaches the following:
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.
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:
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:
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: