Throughout the past 15 months of the COVID-19 pandemic, there have been a significant number of programs that have gotten money into individuals’ and businesses’ pockets. The most common were the multiple rounds of stimulus payments and the Paycheck Protection Program loans and Employer Retention Tax Credit for businesses. However, the American Rescue Plan Act of 2021 (ARPA) that was passed by Congress earlier this year also increased the child tax credit significantly.
Prior to the new law, taxpayers under a certain income thresholder ($400,000 for married filing joint taxpayers) received a $2,000 credit per child under age 17. ARPA allows many taxpayers an additional credit for 2021 only. For children under age 6 at the end of 2021, the credit is $3,600. For all other children under 17, the credit is $3,000.
There are reduced income thresholds for these additional credits:
- Married Filing Joint $150,000
- Qualifying Widow(er) $150,000
- Head of Household $112,500
- Single $75,000
Those filers above these thresholds can still claim the $2,000 credit as long as they are under the previously existing income threshold.
One of the potentially positive impacts of ARPA is that it comes with advanced payments of the child tax credit. Those advance payments are not just for those taxpayers getting the increased $3,000 or $3,600 credit; they are for all taxpayers who are eligible for the child tax credit.
Similar to the stimulus payments, the IRS will estimate a taxpayer’s 2021 income based on 2020 tax returns. They will then calculate what they expect your child tax credit to be, and they will advance half of that in the final six months of the year.
For example, a taxpayer filing a joint return with income of $130,000 who has a 4-year-old child and a 7-year-old child would get a $6,600 child tax credit. Half of that amount – $3,300 – would be advanced from July to December in $550 monthly installments. When filing the 2021 tax return, a credit of $6,600 would be claimed, and the fact that $3,300 was already received would also be reported.
In the case of joint filers who have an income of $250,000 and have a 4-year-old and a 7-year-old, they would be eligible for a $4,000 credit, $2,000 of which would be paid in monthly installments of $333.33 starting in July.
The monthly payments are set to commence on July 15, 2021. Some taxpayers would prefer not to get the advance payment for a number of reasons, the two most common of which are:
- Expected changes to 2021 income that will reduce or eliminate eligibility
- Wanting to get a larger refund at tax time
Fortunately, taxpayers who do not want to receive an advance on the credit from July to December can opt out of the payments. The IRS is still working on a way to decline the advance, which should be up and running by July 1.
It is important for taxpayers to be cognizant of what the anticipated 2021 child tax credit is for their specific situation so that they can make a determination as to whether to accept or decline the advance payments.
By Dan Massey, CPA, Manager
This installment is brought to you by Dan Massey. Dan is a Partner in the firm’s Assurance Division. He performs audit services for clients in many industries, focusing on construction, entertainment production, and not-for-profit entities.
Dan is both a member of the American Institute of Certified Public Accountants (AICPA) and the Pennsylvania Institute of Certified Public Accountants (PICPA). He is also chairman of the C.O.R.E. Task Force for the Keystone Chapter of Associated Builders and Contractors.
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