The American Rescue Plan Act of 2021 makes substantial, temporary improvements to the child tax credit for 2021, which may increase the amount you might receive. If you have qualifying children under the age of 18, you may be able to claim a child tax credit starting on July 15th. You may also be able to claim a partial credit for certain other dependents who are not qualifying children. But the boost is temporary (only 2021) unless Congress passes the American Families Plan.

Ages of Qualifying Children

The legislation makes 17-year-olds eligible as qualifying children in 2021. Thus, children age 17 and younger are eligible as qualifying children in 2021.

Increase in Credit Amount

For 2021, the child tax credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age 6). The partial credit for other dependents who are not qualifying children remains at $500 per dependent.

Phaseout of Credit

The combined child tax credit (the sum of your child tax credits and credits for other dependents) is subject to a phaseout based on modified adjusted gross income (MAGI). Special rules start phasing out the increased portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the pre-existing phaseout rules.

The following table summarizes the effect of the phaseouts on the child tax credit in 2021, based on MAGI.

Refundable Credit

The aggregate amount of nonrefundable credits allowed is limited to tax liability. With refundable credits, a taxpayer may receive a refund at tax time if they exceed tax liability.

For most taxpayers, the child tax credit is fully refundable for 2021. To qualify for a full refund, the taxpayer (or either spouse for joint returns) must generally reside in the United States for more than half of the taxable year. Otherwise, under the pre-existing rules, a partial refund of up to $1,400 per qualifying child may be available. The credit for other dependents is not refundable.

Advance Payments

Eligible taxpayers may receive periodic advance payments for up to half of the refundable child tax credit during 2021, generally based on 2020 tax returns.  The U.S. Treasury will make the payments between July and December 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6).  So, a family with three children ages 5, 7 and 16 could see an extra $800 per month in their bank account through the latter half of the year.The credit goes away once a child reaches 18.

Deposits will be made from July through December. The payments that represent the first half of 2020 will be provided later in a lump sum. Payments will be automatically deposited into accounts on file with the IRS, without any additional action required.

The IRS said eligible taxpayers who don’t want the advance payments and instead would like to save the full child tax credit until next year will be able to decline the checks.

Prepared by Broadridge Investor Communications Solutions, Inc. Edited by BFSG.

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