- Discover more about the additional credit amounts available.
- Learn about the change in refundability for the new child tax credit.
- Find out how the credit phases out for high-income tax payers.
- Learn more about the advance payments available.
- Find more information about the reconciliation of advance payments with the credit.
- Learn how a child’s death is taken into account in determining the annual advance amount.
- Get more information about the Treasury’s online portal.
The American Rescue Plan Act offers an increased child tax credit!
An increased child tax credit is part of President Biden’s stimulus package to help tackle the coronavirus pandemic and stimulate the economy. This stimulus package, passed by Congress on March 10, 2021, is known as the American Rescue Plan Act. It will provide lower-income parents with substantial financial assistance and support various other efforts to stimulate the economy. Even though the benefit of a tax credit traditionally isn’t available until after the tax return for the year has been filed, for 2021, the IRS will pay a portion of the credit in advance in the form of monthly payments from July through December. Fiducial has the details below!
- Additional Credit Amounts – Normally, the credit is $2,000 per eligible child. For 2021, it has increased to $3,000 for each child under age 18 (normally under age 17). The amount for children under age 6 at the end of the year has increased to $3600.
- Refundability – A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the child tax credit is nonrefundable, but for 2021, it is fully refundable.
- High-Income Phaseout – Congress designed the credit to only provide parents of lower incomes with a tax benefit. Thus, the credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold.
2021 MAGI PHASEOUT – CHILD TAX CREDIT
- Example 1: Jack and Jill have two children—Ella, age 4, and Joe, age 8. Their child tax credit for 2021 before the phaseout will be $6,600 ($3,600 + 3,000). They file a joint return and their AGI is below $150,000, so they will receive the full $6,600. However, if their AGI for 2021 is $170,000, they would have to reduce (phase out) the credit by $1,000 ($50 x [($170,000-$150,000)/1,000]). Thus, their child tax credit would be $5,600.
Note: This phaseout only applies to the increase in the credit. Families that aren’t eligible for the higher child credit would still be able to claim the regular credit of $2,000 per child subject to the normal phaseout thresholds of $400,000 for married couples filing jointly and $200,000 for others.
Example 2: Using Jack and Jill from example #1, they qualified for a credit of $6,600 before phaseout. If their AGI equaled $220,000, they would completely phase out of the additional 2021 credit. However, they would still qualify for the normal $2,000 per child credit. Since their AGI is below the regular $400,000 phaseout threshold, their credit for 2021 would be $4,000 (2 x $2,000).
Under a special provision included in the new tax law, to get the credit benefit into the hands of taxpayers as quickly as possible, the Secretary of the Treasury has been charged with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments equal to 1⁄12 of the amount the IRS estimates the taxpayer would should receive according to the information on the 2020 return.
If the taxpayer has not yet filed their 2020 return, the the Treasury will use their 2019 information. In this instance, the amount of the payments may change (either reduced or increased) when the taxpayer files their 2020 return. The initial advance payment won’t arrive before July 1, 2021, and monthly payments would end in December 2021. Taxpayers may claim any balance of the credit due on their 2021 tax return.
- Reconciliation on the 2021 Tax Return – The advance payments will reduce the child tax credit claimed on the tax return, but not below zero. If the aggregate amount of the advance payments to the taxpayer exceeds the amount of the allowable credit, the excess must be repaid unless the taxpayer meets the safe harbor test.
- No Repayment Safe Harbor – The amount of the excess advance repayment is eliminated or reduced based on a safe harbor that applies to lower-income taxpayers. Thus, families with a 2021 MAGI below the applicable income threshold (see table below) will not have to repay any advance credit overpayments that they receive.
SAFE HARBOR APPLICABLE MAGI
A child isn’t taken into account in determining the annual advance amount if the death of the child is known to the IRS as of the beginning of the calendar year for which the estimate is made.
The Secretary of the Treasury will establish an online portal for taxpayers to elect to not receive advance payments or provide information that would affect the amount of the advance payment, including the birth of a qualifying dependent, change in marital status or significant changes in income.
It will take the Treasury some time to initiate the advance payments. Do you have questions about the child tax credit? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.