Authored by Andres Chavez at Condley and Company

In March 2021, the Child Tax Credit (CTC) was modified by the American Rescue Plan Act (ARPA). These modifications include an increased amount in the credit, an expansion of the definition of a qualifying child, an ability to fully refund the credit, stricter phaseout limits, and the addition of an Advanced CTC update portal program that taxpayers can use to update information for monthly payment distributions. However, these modifications are only available for the 2021 tax year and the CTC will not be continuing under these rulings for future tax years.

Generally, the CTC is $2,000 per qualifying child. For the tax year 2021, the CTC is $3,000 per qualifying child between the ages of six and seventeen and $3,600 for each qualifying child under the age of six.

According to Code Sec. 152 (c), a qualifying child for the CTC is defined as a child who:

• Is related to the taxpayer
• Generally, lived with the taxpayer for at least six months during the year
• Is a U.S. citizen, national, or U.S. resident
• Is under the age of seventeen by the end of the tax year

However, the ARPA introduced modifications to the qualifying child definition that allowed children to be seventeen by the end of the tax year to be eligible to receive the credit. It is also important to note that along with the CTC being fully refundable, taxpayers do not need to have any earned income to be eligible to receive this credit.

Along with the increased benefits of the CTC come stricter income limitations to receive the maximum benefit of the enhanced credit. The phaseout calculation is based on the taxpayer’s Modified Adjusted Gross Income (MAGI). For Married Filing Joint (MFJ) taxpayers and individuals filing with the status of Qualified Widow, the phaseout begins at $150,000. For Head of Household it begins at $112,500, and for all other statuses it begins at $75,000. Once the taxpayer reaches the phaseout amount, the credit is reduced by $50 for each $1,000 of the taxpayer’s MAGI. However, in a unique caveat for the 2021 tax year, taxpayers filing with the status of MFJ with MAGI of no more than $400,000 can receive the CTC amount of $2,000 per qualifying child. All other taxpayers filing with statuses other than MFJ can receive this same benefit so long as their MAGI is no more than $200,000. This additional phaseout limitation will also be subject to a reduction in the CTC by $50 for each $1,000 that a taxpayer’s MAGI exceeds these amounts.

Taxpayers are also eligible to receive 50% of the estimated CTC amount in the form of periodic advance payments. This is a unique program, exclusive to tax year 2021, that allows 50% of the total advance CTC payment amount to be divided into monthly installments for taxpayers to receive during the latter half of tax year 2021. The estimate is calculated based on information furnished to the IRS such as the taxpayer’s 2020 tax return, or if not yet available, the taxpayer’s 2019 tax return. Taxpayers also have the option to provide the IRS with updated information using the CTC Update Portal. This will allow taxpayers to provide the IRS with their accurate financial information in regards to their 2021 tax year. Additionally, the update portal allows taxpayers to opt out of receiving the advanced payments or to provide updated banking information. Otherwise, the IRS will use the bank account information previously provided on the most recent tax return on file. If no bank account information is available, these payments will be mailed to the taxpayer’s address on file. Taxpayers can also use the update portal to inform the IRS of any children being born in 2021, any changes in the number of qualifying children, and a change of filing status. It is also emphasized by the IRS that the advance CTC payments are not to be included in taxable income as they file their 2021 tax returns.

Taxpayers must understand that if the amount of the advanced payments exceeds the total amount that should have been received, the taxpayers may be subject to repay some or all the excess back to the IRS. However, in the events of taxpayers receiving excess amounts of payments, repayment protection is available for some taxpayers that meet the eligibility requirements. To receive repayment protection, taxpayers’ MAGI for 2021 are subject to phaseout limits of $120,000 to $60,000 for MFJ, $100,000 to $50,000 for head of household, and $80,000 to $40,000 for single and married filing separate filers. If the taxpayer’s MAGI exceeds the top limits of these phaseout amounts according to their respective filing status, then no repayment protection will be available and they will be subject to repayment. If the taxpayer’s MAGI is between the phaseout limits, the repayment amount will be reduced. If the MAGI is below the lower limit, taxpayers qualify for full repayment protection.

If the taxpayer did not receive all of their advanced credit payments, taxpayers may include the remaining amount in the form of a credit on their 2021 tax return.

To aide in the reconciliation process of the enhanced CTC, the IRS plans to send each taxpayer who received any form of the 2021 advance CTC payments a Letter 6419 by the end of January 2022. Included in Letter 6419 will be the total amount that the IRS issued to the taxpayer for advanced payments.

It is also worth noting that the advance CTC payments are at risk to be garnished by nonfederal creditors and will not be offset for past due taxes to the IRS, child support, or any federal or state debts. If, however, a taxpayer’s 2021 return results in a refund, any remaining CTC amounts included in the refund may be subject to offset for tax debts or any federal or state debts.