2021 Enhanced Child Tax Credit

On March 11, 2021, President Joe Biden signed into law the American Rescue Plan Act (No. 117-2). Under this Coronavirus relief package, the child tax credit was expanded. The previous credit of $2,000 per child under the age of 17 increased to $3,000 for children ages 6-17 (17-year-olds became eligible), and $3,600 for children under the age of 6. A portion of these tax credits were paid in advance unless you opted out of the payments or weren’t eligible. They are also fully refundable, meaning any credits not used by the taxpayer will be paid out to them. Although the maximum child tax credit has been increased, not everyone will get the entire expanded tax credit per child.

How much will I receive per child?

The number of credits you are eligible for depends on your Adjusted Gross Income (AGI),  number of children, and their age. You can enter your information on Schedule 8812 (Form 1040) from the IRS (instructions for Schedule 8812). This document will help you determine your child tax credits, report advance payments, and determine any additional tax owed due to overpayment on the advance child tax credit payments. To better understand how many of the child tax credits you will receive, it’s helpful to think of the 2021 expanded child tax credits as having two components.

The first component is the standard $2,000 credit for children 17 and under. The reductions for this portion of the tax credit starts if your AGI is above $400,000 for joint returns and $200,000 for all other filing statuses. If you exceed these AGI limits for your filing status, credit reductions begin to take effect at $50 per $1,000 that your AGI exceeds the threshold. Also, if your income is above these thresholds, you aren’t eligible for any additional child tax credits for 2021. 

The second component is the additional $1,000 or $1,600, depending on your child’s age. The reductions for this portion of the tax credit starts if your AGI is above $150,000 for joint returns, $112,500 for heads of household, and $75,000 for single or married filing separately. If you exceed these AGI limits for your filing status, credit reductions begin to take effect at $50 per $1,000 that your AGI exceeds the threshold. The reductions will accumulate up to either $1,000 or $1,600 per child. This means they won’t deduct from the normal $2,000 child tax credits until you reach those respective thresholds stated above.

How to reconcile advance payments

The American Rescue Plan Act increased child tax credits and also distributed a portion of them as monthly advance payments. If you received advance payments, you likely collected 50% of your eligible tax credit.

• For children ages 6 to 17, you might have received up to $250 monthly.
• For children under the age of 6, you might have received up to $300 monthly.

 IRS provides you with a summary of the advance payments you received on Letter 6419 and through their online portal. Using this information, you must deduct the total amount you received from the number of eligible credits you qualify for. This is the number of credits you can claim for your 2021 taxes.

Overpayment of advance tax credits

The IRS likely used your 2020 tax return to determine the amount of advance payment you received. Overpayment may have occurred if the number of credits you are eligible to claim changed. This could include changes to your filing status, AGI, custody arrangements, or residency status. Depending on your AGI, you may need to pay back the entire overpayment, part of it, or none at all. The American Rescue Plan includes repayment protection, for some people. If your AGI is under $60,000 for joint returns, $50,000 for head-of-household returns, and $40,000 for single returns or married couples filing separately, you won’t have to pay back any advance tax credits you received. On the contrary, if your AGI is over $120,000 for joint returns, $100,000 for head-of-household returns, and $80,000 for single returns or married couples filing separately, you will need to pay back the entirety of any overpayment. If you are between the two thresholds, you will need to pay back a portion of the overpayment. If this is the case, you need to calculate your repayment protection amount.

To calculate this value, you must find the number of children used to determine your advance payments (Letter 6419). Next, subtract the number of children used to calculate your 2021 child tax credits and multiply this number by $2,000. Take that value and multiply it by the percent value your AGI is between the two thresholds. This calculation tells you your repayment protection amount, which you can deduct this amount from the overpayment. The resulting value is what you will have to pay back and report as additional tax on your 2021 return.