From Thomson Reuters/Pinnacle CPA Advisory Group —
Dear Client,
The new American Rescue Plan Act of 2021 (ARPA) was signed into law on 3/11/21. It includes significant changes to the Child Tax Credit (CTC) rules. These changes are temporary and only apply to the 2021 tax year. However, they will be a big help to many parents. Here’s a quick summary of the taxpayer-friendly changes.
Broadened definition of ‘Qualifying Child’
The definition of a qualifying child is broadened to include children who are age 17 or younger as of 12/31/21, as opposed to the prior-law age-16-or-younger requirement.
Bigger maximum Child Tax Credit
The maximum CTC is increased from $2,000 to $3,000 per qualifying child, or $3,600 for a qualifying child who is age five or younger as of 12/31/21. However, the increased credit amounts are subject to their own income-based phase-out rule. So, for 2021, the CTC is subject to the following two sets of phase-out rules:
- The increased CTC amount ($1,000 or $1,600, whichever applies) is phased out (reduced) for single taxpayers with Modified Adjusted Gross Income (MAGI) above $75,000. That amount is increased to $112,500 for heads of household and $150,000 for married joint-filing couples. The increased credit amount is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phase-out threshold.
- The “regular” $2,000 CTC amount is subject to the pre-ARPA phase-out Under that rule, the “regular” credit is phased out if your MAGI exceeds $200,000 or $400,000 for a married joint-filing couple. The credit is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phase-out threshold. If you are ineligible for the increased CTC amount for the 2021 tax year , you can still claim the “regular” $2,000 CTC (subject to the regular phase-out rule).
Child Tax Credit is fully refundable for eligible taxpayers
For the 2021 tax year , the CTC is fully refundable if you (or your spouse, if you file a joint return) have a principal place of abode in the U.S. for more than one-half the year or are a bona fide resident of Puerto Rico for the year. If you are a member of the U.S. Armed Forces who is stationed outside the U.S. while serving on extended active duty, you are treated as having a principal place of abode in the U.S.
The MAGI phase-out rules explained earlier apply in determining your allowable refundable CTC for the 2021 tax year.
These changes are temporary and only apply to the 2021 tax year. However, they will be a big help to many parents.
IRS will make advance Child Tax Credit payments
Pursuant to another ARPA provision, the IRS is directed to establish a program to make monthly advance payments of CTCs (generally via direct deposits). The advance payments will equal 50% of the IRS’s estimate of your allowable CTC for the 2021 tax year.
These advance payments will be made in equal monthly installments in July through December of this year. To estimate your advance CTC payments, the IRS will look at the information presented on your 2020 Form 1040 or on your 2019 return if your 2020 return has not yet been filed.
However, if the IRS determines that it’s not feasible to make monthly advance CTC payments, it can make advance payments based on a longer interval and adjust the amount of the advance payments accordingly.
To facilitate the payment of advance CTCs, the IRS is directed to create an online portal to allow taxpayers to change the number of their qualifying children and marital status, reflect significant changes in income, and update other factors as determined by the IRS. Taxpayers also may use the online portal to elect out of the advance payments. If you would prefer to receive a larger, lump-sum refund after filing your return, you probably would want to elect out of advance payments. We can help with that once the online portal is up and running.
Social Security number requirements are unchanged
As was the case before the ARPA, you must include a qualifying child’s name and Social Security Number (SSN) on your 2021 Form 1040 to claim a CTC for the child. In addition, the SSN must have been issued before the due date for filing your 2021 return.
Conclusion
For 2021, the temporary Child Tax Credit changes made by the ARPA will make the CTC more widely available and worth more for some taxpayers. Please contact the Pinnacle CPA Advisory Group if you have questions or want more information. Reach us at (614) 942-1990, email to info@cpaagi.com, or fill out our Contact form at cpaagi.com/contact.
Very truly yours,
Dave Krebs, CPA
Pinnacle CPA Advisory Group