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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.

Refundability

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.

High-Income Phaseout

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. 

Advance Payments

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.

Want to ensure your 2020 tax information is used to determine advance payments for the child tax credit? 

Book a FREE tax preparation appointment here so you can file your taxes ASAP: https://msgsndr.com/widget/booking/kIWnLZ6tnIKZ5fZ6akhN 

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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. 

If you paid your ETC tax prep fees upfront, the IRS will send you the money directly. 

If you chose to pay your ETC tax prep fees from your refund, we use BeneTax (our clearing house) to perform this transaction. Your IRS refund is received by BeneTax, they deduct ETC’s tax prep fees, and they ACH you your tax refund.

Like before, your stimulus check may go to BeneTax. BeneTax will then issue either a check or ACH once they receive the IRS stimulus on your behalf. We will notify you immediately once we have confirmation on this matter from BeneTax.

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