The American Rescue Plan (ARP) has more than just stimulus payments to offer. Families with children under the age of 18 may be eligible for a monthly benefit starting in July. Many families have benefited from child tax credits in years past, but the enhanced credit differs in several ways.
Old Child Tax Credit
Let's start with the basics of the "old" child tax credit. Before the ARP, the maximum child tax credit a family could qualify for was $2,000 per child, age 16 and under. To fully qualify, modified adjusted gross income (MAGI) had to be under $400,000 for those married filing joint or $200,000 for other filing statuses. Once income exceeded those threshold amounts, the credit phased out at $50 for each $1,000 of income over the threshold. The tax credit was partially refundable, up to $1,400. Partially refundable means if the amount of the credit exceeds taxes owed, the taxpayer receives the excess amount up to $1,400 outright.
It's important to understand that the "old" child tax credit is not going away, and many families will still qualify even if they are not eligible for the "new" credit.
New Child Tax Credit
The expanded child tax credit available for the tax year 2021 is different from the old child tax credit in the following ways:
- Amount – the credit increased from $2,000 to $3,600 for children under age six and $3,000 for children under age 18
- Age Limits – children under age 18 now qualify
- Income Limits – phase-out MAGI limits for those married filing joint begin at $150,000 or $75,000 for other filing statuses; phases out $50 for each $1,000 of income exceeding the threshold
- Refund-ability – the credit is fully refundable
- Advance Payment – families will receive partial credits throughout the year before filing taxes
The IRS will use 2020 income information to determine which taxpayers will qualify for the 2021 expanded child tax credit. Eligible families can receive 50% of the child tax credit in installments beginning in July 2021 through December 2021. The remaining 50% of the credit can then be claimed when filing 2021 taxes. Families will also be able to forgo advance payments and wait until tax time to claim the full credit. The IRS plans to roll out a portal later this year where families will be able to opt-out of advance payments if desired.
Since the IRS bases the 2021 enhanced child tax credit on 2020 income information and advance payments are an option, what happens if your 2021 income exceeds the threshold? You will likely have to pay back any advance payments for which you were ineligible when you file your tax return, depending on your specific situation. If your income has changed in 2021, you will provide updated information to the IRS on the portal (once available). You will also indicate a filing status change or if the number of children has changed.
Suppose your income level is close to threshold limits of $150,000 for married filers or $75,000 for single filers. In that case, there may be some planning opportunities available to help qualify for the enhanced child tax credit. Below are ways to lower your MAGI:
- Make a deductible IRA contribution ($6,000 maximum contribution for 2021; must not be covered by an employer retirement plan OR MAGI is below $105,000 for married filers or $66,000 for single filers)
- Shift employer retirement account contributions from Roth to pre-tax
- Increase pre-tax contributions to an employer retirement account ($19,500 maximum employee contribution in 2021 for 401(k)s and 403(b)s)
- Contribute to a health savings account (HSA) ($7,200 maximum contribution for families; $3,600 for single filers) or a medical flexible spending account (FSA) ($2,750 maximum contribution in 2021)
- Contribute to a dependent care FSA ($10,500 potential maximum contribution in 2021; subject to employer plan rules)
- Donate to charity ($600 deduction for couples; $300 for singles in 2021; more if you itemize deductions)
- Harvest investment losses (up to $3,000 allowable deduction)
If your income is still too high to qualify for the expanded child tax credit, remember, you can still be eligible for the old child tax credit of $2,000 per child under age 17!
If you qualify for the enhanced child tax credit, be on the lookout for the IRS portal rollout in a few months. If you don't qualify, it's ok; the "old" child tax credit will likely still be available if you qualified in past years. If your income is close to the new threshold, consider making adjustments in order to lower MAGI and be eligible for the enhanced credit.
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