2021 Child Tax Credit

Posted on July 29th, 2021

The American Rescue Plan, signed into law by President Biden this past March, increases the child tax credit for 2021 for many taxpayers. Those with qualifying children under the age of 18, may be able to claim the credit. Taxpayers may also be able to claim a partial credit for certain other dependents who are not qualifying children.

Increased Credit Amount

Children ages 17 and younger are eligible as qualifying children in 2021. Normally the credit is available for ages 16 and under. The credit amount is increasing, for tax year 2021 only, 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.

Refundable Credit

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 one-half of the taxable year. Otherwise, under the preexisting 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

Taxpayers may receive periodic advance payments for up to one-half of the refundable child tax credit during 2021. The U.S. Treasury will make the payments for periods between July 1 and December 31, 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6).

Taxpayers that receive advanced payments should be aware they will have a higher tax bill come April, and plan accordingly.

Phaseout of Credit

The combined child tax credit is subject to phaseout based on modified adjusted gross income (MAGI). Special rules start phasing out the additional portion of the child tax credit in 2021 at much lower thresholds than under preexisting rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the preexisting phaseout rules. Phaseout of Credit in 2021 Based on MAGI

Taxpayers will received the full credit if their MAGI does not exceed $75,000 ($150,000 for joint returns and surviving spouses, $112,500 for heads of households).

The credit phases out for MAGI exceeding the income limits:

  • $50 for each $1,000 (or fraction thereof) of MAGI exceeding these thresholds
  • The total increase in the credit amounts for 2021 [e.g., if 3 qualifying children (2 under the age of 6), then $10,200 increased credit minus $6,000 preexisting credit = $4,200 increase in credit]
  • $6,250 ($12,500 for joint returns, $4,375 for heads of households, $2,500 for surviving spouses); these amounts are equal to 5% of the difference between the higher preexisting phaseout thresholds and the special thresholds for 2021

Source: Broadridge