by Ryan H. Law
The child tax credit (CTC) has undergone a lot of changes since it was introduced in 1998. It was initially set at $400, and increased over the years to $1,000 in 2012.
In 2017 the Tax Cuts and Jobs Act (TCJA) doubled that amount to $2,000. The TCJA also increased the phase-out thresholds and made up to $1,400 refundable.
NOTE: Refundable means that you can get back more than you paid in taxes. If a person has a tax burden of $1,000 and they have $2,000 in CTC they would get a refund of $1,000. If they have a tax burden of $0 and have a CTC of $2,000 they would get a total of $1,400 back.
Let’s use a consistent example throughout this post. Max and Norene file their taxes MFT and they have 3 children – ages 3, 7, and 12
Under the TCJA they would have a total of $6,000 in child tax credit, and up to $4,200 of that would be refundable. CTC under the TCJA stops at age 17 (so it is only available if you have children age 16 and under).
Here are the income thresholds under the TCJA (these are important because they come into play for the American Rescue Plan of 2021):
|Tax filing status||Maximum AGI for full credit||AGI where credit drops to $0|
|Single, Head of Household (HOH), Married Filing Separately (MFS)||$200,000||Over $240,000|
|Married Filing Jointly (MFJ)||$400,000||Over $440,000|
AMERICAN RESCUE PLAN OF 2021
The American Rescue Plan (ARP) of 2021 increases the child tax credit for one year. Democrats plan to vote later this year to make the changes permanent1.
Changes in age
The ARP increases the age of a qualifying child by one year, to age 17. This will benefit people who have a child that turns 17 in 2021 (we happen to be one of those families).
Increases in amount
The ARP increases the CTC to $3,600 if you have a qualifying child between 0-5 (age 5 or less as of December 31, 2021), and to $3,000 if you have a qualifying child between 6-17 (age 6-17 as of December 31, 2021).
Another change with the ARP is making the entire credit refundable instead of $1,400.
Max and Norene, who file their taxes MFT and have 3 children – ages 3, 7, and 12, now have a total CTC of $9,600 ($3,600 + $3,000 + $3,000), and all $9,600 is refundable.
If Max and Norene have a tax burden of $2,000 before the CTC they would get a refund of $7,600 ($2,000 – $9,600).
The income thresholds for the first $2,000 in child tax credit remains at the same levels as the TCJA (See Table 1). The additional $1,000/$1,600 is subject to different thresholds:
|Tax Filing Status||Maximum AGI for full additional child tax credit|
Hold on here – the math starts to get a bit more complicated: After those levels the additional amount is reduced by $50 for each increment of $1,000. A couple filing MFJ who have taxable income of $160,000 and one child would see their CTC drop by $500 ($10,000 over maximum AGI divided by $1,000 = 10. 10 X $50 = $500).
Let’s go back to Max and Norene. Imagine they have taxable income of $170,000, which is $20,000 over the maximum, or 20 units of $1,000. Their full CTC is $9,600, but it will be reduced by $1,000 (20 x $50 = $1,000), for a total of $8,600.
Here is the income phaseout and maximum AGI for the extra CTC in 2021:
|Tax Filing Status||Income phaseout starts at||Additional $1,000||Additional $1,600|
Keep in mind that the $2,000 CTC the phase-out limits remain the same as the TCJA. If a couple is filing MFJ and they have taxable income of $250,000 that phases them out of the extra, but not the $2,000 credit per child.
50% paid out monthly
50% of the CTC for 2021 is supposed to be paid out in monthly payments between July and December of 2021. For a child under age 6 that will be $300 a month, and for a child ages 6-17 that will be $250 a month. That will get them 50% of the credit before December, and the remaining 50% will be paid out on their tax return.
To do this, however, the IRS has to create a portal where people can update their marital status, income, and number of qualifying children by July of this year.
Their is some doubt that the IRS can make that happen as they would need to build the system and verify all data entered. The portal will also allow people to opt-out of the monthly payments and instead receive the full credit on their 2021 taxes.
For most people, this payment amount will be based on their 2020 tax returns. If they haven’t filed their 2020 return before July it will be based on 2019 taxes.
If someone opts for the monthly payments but their income goes up in 2021 beyond the amounts in Table 3 they may have to pay part or all of it back.
What this means for the average American family
The median household income in the United States is $68,7032. Ignoring all other deductions and credits except the standard deduction, they have an AGI of $43,903, which leaves them with a tax burden of $4,8733. If they have two children, ages 10 and 14, they have CTC of $6,000. They will get a refund of $1,127 ($4,873 – $6,000). If they have paid any in estimated or monthly taxes and if they have other credits, their refund could be much higher.
This credit will have a big impact on the tax bill of anyone with children who falls under the income thresholds for both the $2,000 child tax credit and the extra child tax credit for 2021.
Summary of the Child Tax Credit under the American Rescue Plan of 2021
- 17 year-olds qualify
- Increased credit to $3,600 for children ages 0-5, and $3,000 for children 6-17
- Makes the credit fully refundable
- Allows half of the credit to be paid monthly July – December of 2021
- It is very likely that this tax change will become permanent
Kiplinger has created a 2021 Child Tax Calculator. You can find that calculator here.
Statistics cited and sources:
(1) The expanded $3,000 child tax credit would help 10 million kids living in poverty. Democrats aim to make it a permanent increase
(2) Income, Poverty and Health Insurance Coverage in the United States: 2019
(3) Full calculation: $68,703 – $24,800 (standard deduction) = $43,903. Using the tax tables, they have a tax burden of $4,873. Their tax is $1,975 + 12% of the amount over $19,750. $43,903 – $19,750 = $24,153. $24,153 x 12% = $2,898. $1,975 + $2,898 = $4,873