The Child Tax Credit as we know it originated during the Clinton administration, but the recently enacted American Rescue Plan created a new version. The updated version of this tax credit could have a beneficial impact on Americans struggling through the COVID-19 pandemic. The changes to many aspects of the credit are detailed below.
Monthly Payments Versus Once-a-Year Credit
First, the new version of the Child Tax Credit applies only to the year 2021. If a family qualifies, the credits are $3,600 for each child under age 6 and $3,000 for those ages 6 to 17.
The major difference is not the limits, but that in 2021 half of the credit will be paid on a monthly basis in the second half of the year. From July through December, the credit will be paid out monthly at a rate of $300 for each child under age 6 and $250 for each child ages 6 to 17. In prior years, the tax credit was available only when filing an annual tax return. The other half of the credit in 2021 will be reconciled on 2021 income tax returns.
Income Limits and Phase-Outs
Similar to the stimulus checks, the tax credit is based on adjusted gross income. To receive 100 percent of the credit, the AGI limits are $75,000 for single filers, $112,500 for heads of household and $150,000 for those married filing jointly.
The phase-outs start once a taxpayer exceeds these AGI thresholds. Every $1,000 in AGI over the limit reduces the credit by $50 (per dependent child). For example, if a couple filing jointly earned an AGI of $165,000, their credit will be reduced by $750 per child.
Qualification for the Credit
While the tax credit is ultimately based on 2021 income, to facilitate the monthly payments, the new Child Tax Credit will use 2020 income tax returns. For those who have not filed yet, the look-back will be to 2019. The monthly payments will be based on these already filed tax returns and then the balance of the credit be reconciled based on 2021 income.
If a taxpayer receives more interim monthly payments on the tax credit than their 2021 AGI entitles them to, they will need to pay back the unqualified portion of the credit.
In the scenario where a child crosses age thresholds mid-year in 2021, the age for determining the credit will be based on how old the child is on Dec. 31, 2021. For example, a child who turns 6 before the end of the year will qualify for the lower $3,000 credit and not the $3,600 for those under 6.
Existing Child Tax Credit is Still Available
One of the unique features of the new Child Tax Credit is that the old version is still available. This version, which was established under the Tax Cuts and Jobs Act of 2017, has significantly higher AGI thresholds: single taxpayers with an AGI of $200,000 and married filing jointly at $400,000. As a result, many taxpayers will still qualify for this version with its lower credit of $2,000 per child and no monthly payments.
Conclusion – There’s More to Come
As the July 1, 2021 start date approaches, the IRS will release more details on the new Child Tax Credit and what taxpayers can do to take advantage of the changes.