The American Rescue Plan had more benefits for taxpayers than just the 3rd stimulus payment. The plan that was signed on March 11, 2021 includes an update to the Child Tax Credit. We are here to break down everything you need to know about this credit, the updates that were made, and if they apply to you.

What is the child tax credit?

A tax credit for parents of dependent children.

How much is the child tax credit worth?

In Tax Year 2020, the child tax credit is worth $2,000 for eligible dependents under the age of 17 at the end of the year.  The credit is partially refundable and begins to phase out with AGI over $200,000 ($400,000 if married filing jointly).

In Tax Year 2021, the child tax credit is 100% refundable and increased to $3,000 for eligible dependents age 6 to 17 and $3,600 for eligible dependents under age 6. The increased credit of $1,000 or $1,600 begins to phase out for individuals with AGI over $75,000, $150,000 (if filing jointly) and $112,500 for head of household filers. The original $2,000 credit per eligible dependent does not begin to phase out until AGI exceeds $200,000 ($400,000 if filing jointly). Eligible dependents must be related to you, live with you for 6 months or more, and be a U.S. citizen, U.S nationals, or U.S. resident aliens.

Example: Married couple with $80K AGI and a 10-year-old dependent would receive a child tax credit of $3,000 for 2021.

Will I get this credit if I don’t owe taxes?

Prior to the passage of the new law, the child tax credit was both nonrefundable and refundable, depending on if the credit amount exceeded taxes owed. For Tax Year 2021, the $2,500 earned income threshold was removed. So, even if you do not owe taxes or haven’t earned any income you can still receive this ‘refundable’ credit entirely, similar to receiving a stimulus check.

How long is this ‘expanded’ child tax credit good for?

Currently, the child tax credit increase only applies to Tax Year 2021. It will revert to 2020 amounts for Tax Year 2022, unless a new bill is passed to extend the enhanced credit.

What is the advanced payment being discussed?

It was instructed in the law that the payment can be claimed on a monthly basis in advance of filing a tax return. The IRS will make monthly payments from July 2021 through December 2021 amounting to ½ of the child tax credit, and the remaining half will be realized when claimed in the spring of 2022 when the taxpayer files the 2021 tax return.

Example: A taxpayer who qualifies for the $3,000 child tax credit on their 2021 tax return, could receive $1,500 of it through monthly payments ($250/month) and claim the other $1,500 on their tax return.

It’s been noted that this program may be in doubt as the IRS is running into operational constraints because of the extended tax season, 3rd stimulus payment and other recent tax changes (i.e. unemployment benefit exclusion up to $10,200).

How does a taxpayer sign up for monthly payments?

Currently, the plan is to have all qualified parents automatically opted-in for the advanced monthly payments. The taxpayer would then use a newly created IRS portal to either opt-out or make adjustments to the credit amount based on life events (i.e. have a child in 2021).

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