New Refundable Child Tax Credit (CTC) from the American Rescue Plan Act

The American Rescue Plan Act of 2021 modifies a number of tax provisions, including modifications to the child tax credit. For 2021, the maximum child credit is increased to $3,000 for qualifying children up to age 18 ($3,600 for qualifying children under age six), the credit is fully refundable for most taxpayers, one-half of the credit may be distributed in regular payments during the last half of the year, and the credit is also expanded to Puerto Rico and American Samoa.

The IRS and the Treasury have announced that the first monthly payment of the new refundable Child Tax Credit (“CTC”) from the American Rescue Plan will be made on July 15. Further, the increased CTC payments will be made on the 15th of each month unless the 15th falls on a weekend or holiday. Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above. Notably, the American Rescue Plan had increased the maximum CTC in 2021 to $3,600 for children under the age of 6 and to $3,000 per child for children between ages 6 and 17. Typically this credit has been claimed as a lump sum on the parents’ annual tax returns, lowering their overall tax bill or creating a refund, for the 2021 year however these payments will be made in advance.

Eligibility

The eligibility of a taxpayer to receive the benefit of these payments will be based on either the 2019 or 2020 tax return information, depending on what has been most recently filed by the Taxpayer. The enhanced credit, for the entire year, is worth up to $3,000 per child aged 6 to 17 and $3,600 for children under age 6. That’s an increase from $2,000 per child under age 17. The maximum amount is available to individuals making $75,000 or less and married couples making $150,000 or less, with a phaseout for incomes above those thresholds.

An individual may claim a child tax credit (CTC) for each qualifying child. A qualifying child generally:

1. must be the taxpayer’s child (including a stepchild, adopted child, or foster child) or sibling (brother, sister, stepbrother, or stepsister), or a descendant of the taxpayer’s child or sibling;


2. must be under age 17 at the end of the tax year;


3. must be a U.S. citizen, national, or resident;


4. must live with the taxpayer for more than half of the year;


5. cannot provide over half of his or her own support for the year;


6. cannot file a joint return for the year other than to claim a refund; and


7. must be claimed as the taxpayer’s dependent.

It is important however to note that while the IRS is basing eligibility for these payments on 2019 and 2020 data, the credit itself is based on 2021 information. This means that individuals may receive the credit based on their older tax information and have to repay the advance credit on their 2021 tax year return if they were not eligible under the income threshold limitations, or if the dependent claimed in the prior returns no longer qualifies.

To help combat this the IRS has released a tool that allows taxpayers to opt-out of the advanced CTC payments. This Portal can be used to double-check current 2021 year eligibility, view any advanced payments that you may be entitled to receive and their payment schedules, update the number of qualified dependents, and opt-out from these advanced payments. Taxpayers who choose to opt-out of advanced payments but who retain eligibility will still be permitted to take the CTC on their 2021 return as a lump sum as they have done in prior years. Taxpayers who wish to opt-out of these advanced payments should do so prior to the July 15 date that the IRS is projected to start sending the first round of payments out.

In the case of a taxpayer who received advance payments in error (for example, where a 2019 or 2020 return indicated a dependent child who is no longer a dependent in 2021), the American Rescue Plan provides a “hold-harmless” provision, protecting taxpayers from having to pay back overpayments of up to $2,000 per child. The full $2,000 amount is ratably reduced for taxpayers with income above a threshold amount ($40,000 for single filers, $50,000 for head of household filers, and $60,000 for joint filers). The $2,000 is completely eliminated for taxpayers with income double the applicable threshold amounts, and the entirety of the overpayment must be paid back.

If there are any questions on these provisions please reach out to your HBK Tax Advisor to discuss eligibility and whether opting out is beneficial for you.