TAX PROVISION

Child Tax Credit

Using Tax Policy to Stimulate the Economy | March 2021

The child tax credit for 2021 has been significantly modified to increase and accelerate payments to families with dependent children. To understand the changes, it is helpful to first understand the pre-ARPA credit structure.

In 2020:

• A maximum credit of $2,000 (up to $1,400 of which could be refundable) applied for each dependent child who was 16 or younger at the end of the year.
• A $500 credit was available for dependents who did not qualify for the child tax credit.
• Phase-out of the credit began at $200,000 of AGI for single taxpayers ($400,000 for married filing jointly).

For 2021:

• The credit amount has been increased to $3,600 for any child under six at the end of the year and $3,000 for children from six to 17 years old (an increase from the 16 years-old age limit in prior years).
• The refundable portion of the credit will increase to $1,500 or $1,800 per child depending on age.

The increased credit is only available for single taxpayers with AGI of less than $75,000 (married filing jointly with AGI of less than $150,000 or head of household of less than $112,500). Those earning more than these limits can still claim the existing $2,000 credit up to the previous phase-out limits. In addition, the prior requirement that the credit could only be claimed by those earning at least $2,500 per year has been eliminated.

Previously, the credit was claimed in total by filing the annual income tax return. This has been modified by allowing taxpayers to elect to receive half of the credit in equal monthly payments spread over the second half of 2021. The advance payment amount will have to be reconciled with the actual credit determined on the 2021 tax return. The reconciliation includes a safe harbor for taxpayers earning less than an AGI limit.

The thresholds for phase-out range of AGI are between:

• $40,000 to $80,000 for single taxpayers,
• $60,000 to $120,000 for married filing jointly and
• $50,000 to $100,000 for heads of household.

Qualifying taxpayers can exempt overpayments of up to $2,000 per child.

It should be noted that although the enhanced child tax credit is only effective for 2021, there is discussion within Congress of extending this provision indefinitely.