The American Rescue Plan Act increases Child Tax Credit value, offers it for older children, and makes it refundable. Taxpayers can get it in an advance income stream from July to December.
Last week, President Joe Biden signed into law a $1.9 trillion American Rescue Plan Act. The highlights of this bill obviously featured the $1,400 stimulus checks, but the package also includes updates to the current child tax credit. This increased child tax credit will not be available until the tax return for 2021 has been filed, but the IRS will actually pay a portion of the credit in advance in the form of monthly payments from July through December.
Ordinarily, the benefit of a tax credit isn’t available until after the tax return for the year has been filed.
Let’s take a look at what the changes entail:
Additional Credit Amounts
Typically, the credit is $2,000 per eligible child (under 17). For 2021, this has been revised to $3,000 for each child under 18 and $3,600 for children under age 6 at the end of the year.
The child tax credit is generally non-refundable. For 2021, however, it is fully refundable. A refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer.
The credit is designed to provide parents of lower incomes with a tax benefit. That’s why this credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 by which the modified adjusted gross income (MAGI) exceeds the threshold.
2021 MAGI Phaseout – Child Tax Credit
Threshold for married filing jointly: 150,000
Threshold for heads of household: 112,500
Threshold for others: 75,000
This phase-out only applies to the increase in the credit.
Under this mandate, the Secretary of the Treasury has been charged with establishing an advance payment plan. Those qualifying for the payments would receive monthly payments equal to 1/12 of the amount the IRS estimates the taxpayer would be entitled to (based on their 2020 return). If the 2020 return hasn’t yet been filed, 2019 information would be used. If the 2019 return is used to determine the advance payments, the amount of the payments can be altered when the 2020 return is filed.
The initial advance payment will arrive after July 1, 2021 and payments will end in December 2021. Any balance of the credit due to a taxpayer can then be claimed on their 2021 tax return. The timeline will depend on how fast the IRS is able to adjust its systems to accommodate this unusual tweak.
Reconciliation on the 2021 Tax Return
The advance payments will obviously reduce the child tax credit that can be claimed on the tax return. However, it will not go down to zero. If the aggregate amount of the advance payments exceeds allowable credit, the excess must be repaid until the taxpayer meets the safe harbor test.
No Repayment Safe Harbor
The amount of the excess advance repayment is eliminated or reduced based on a safe harbor applying to lower-income taxpayers. Families with a 2021 MAGI below the thresholds specified below will not have to repay any advance credit overpayments that they receive:
Safe Harbor Applicable MAGI
For married filing jointly, the threshold is 60,000 and for heads of household, 50,000; for others, it is 40,000.
An online portal will soon be established for taxpayers to choose not to receive advance payments or provide information affecting the advance payment.
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IMPORTANT NOTE FOR CURRENT ETC CLIENTS:
Like before, your stimulus check will be directly deposited from the IRS with the account and routing number that we had when we completed your tax return.
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