Tax Planning

Do You Have Children Under 17 Years Old?

by | Jun 2, 2021

Child tax credit

For the 2021 tax year only, the American Rescue Plan Act of 2021 (ARPA) makes big, taxpayer-friendly changes to the federal income tax child tax credit (CTC).  Here is what you need to know, starting with some necessary background information.

CTC Basics

For 2018-2020 and 2022-2025, the maximum annual CTC is $2,000 per qualifying child.  A qualifying child is an under-age-17 child who could be claimed as your dependent for the year. Basically, that means the child lived with you for over half the year; did not provide more than half of his or her own support; and is a U.S. citizen, U.S. national, or U.S. resident.

The maximum $2,000 CTC is phased out (reduced) if your modified adjusted gross income (MAGI) for the year exceeds $200,000, or $400,000 for a married joint-filing couple.  The credit is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.

For 2018-2020 and 2022-2025, the CTC is partially refundable.

You can collect the refundable amount even if you have no federal income tax liability for the year. So, the refundable amount is free money.  The refundable amount generally equals 15 percent of your earned income above $2,500.

An alternative formula for determining the refundable amount applies if you have three or more qualifying children. In any case, the maximum refundable amount for 2018-2020 and 2022-2025 is limited to $1,400 per qualifying child.  (If you have a 2020 tax liability, the CTC can offset up to $2,000.)


More Generous CTC Rules for 2021

For your 2021 tax year only, ARPA makes the following taxpayer-friendly changes.

Qualifying Children Can Be Up to 17 Years Old

The definition of a qualifying child is broadened to include children who are age 17 or younger as of December 31, 2021.

Bigger Maximum CTC with Separate Phaseout Rule for the Increase

ARPA increased the maximum CTC to $3,000 per qualifying child, or $3,600 for a qualifying child who is age 5 or younger as of December 31, 2021. But the increased 2021 credit amounts are subject to two phaseout rules:

  1. The increased CTC amount—$1,000 or $1,600, whichever applies—is phased out for single taxpayers with MAGI above $75,000, for heads of household with MAGI above $112,500, and for married joint-filing couples with MAGI above $150,000. The increased amount is phased out by $50 per $1,000 (or fraction of $1,000) of MAGI in excess of the applicable phaseout threshold.
  2. The “regular” $2,000 CTC amount is subject to the “regular” phaseout rule explained earlier.

Key point. If you’re not eligible for the increased CTC amount for 2021 because your income is too high, you can still claim the regular CTC of up to $2,000, subject to the regular phaseout rule.

CTC Is Fully Refundable for Most Folks

For the 2021 tax year, the CTC is fully refundable if you (or, if married, you and your joint-filing spouse) have a principal residence in the U.S. for more than half the year. If you are a member of the U.S. Armed Forces who is stationed outside the U.S. while serving on extended active duty, you’re treated as having a principal residence in the U.S.

For 2021, the CTC is fully refundable even if you have no earned income for the year.  The MAGI phaseout rules explained earlier apply in calculating your allowable, fully refundable CTC for 2021.

IRS Will Make Advance CTC Payments (We Hope)

Another ARPA provision directs the IRS to establish a program to make monthly advance payments of CTCs (generally via direct deposits).

Such advance payments will equal 50 percent of the IRS’s estimate of your allowable CTC for 2021. The advance payments will be made in the form of equal monthly installments from July through December 2021. To estimate your advance CTC payments, the IRS will look at the information shown on your 2020 Form 1040 (or on your 2019 return if you have not yet filed your 2020 return).

If you would like to discuss CTC, please don’t hesitate to call me (949) 354-1700.

 It’s a good life!

Randy Signature 50% (FName)


You May Also Like…

Taxpayer Penalties 2023

Taxpayer Penalties 2023

Tax PlanningBradford Tax Institute, January 2023REASONPENALTY RELIEFIRC SECTIONFailure to pay0.50% of unpaid balance...

2023 Key Financial Data Guide

2023 Key Financial Data Guide

Financial Guides Happy New Year to you and your family! I hope you and your family had a safe and healthy holiday...

Investment Advisory Services are offered through Lifetime Financial, Inc., a Registered Investment Advisory. Insurance and other financial products and services are offered through Lifetime Paradigm, Inc. or Lifetime Paradigm Insurance Services. Neither Lifetime Financial, Inc. nor Lifetime Paradigm, Inc., or its associates and subsidiaries provide any specific tax or legal advice. Only guidance is provided in these areas. For specific recommendations please consult with a qualified, licensed Advisor. Past performance is no guarantee of future results. Your results can and will vary. Investments are subject to risk, including market and interest rate fluctuations. Investors can and do lose money and, unless otherwise noted, they are not guaranteed. Information provided is for educational purposes only and is not intended for the sale or purchase of any specific securities product, service or investment strategy. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER, TAX PROFESSIONAL, OR ATTORNEY BEFORE IMPLEMENTING ANY STRATEGY OR RECOMMENDATION DISCUSSED HEREIN.

This message is intended for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient, any dissemination, distribution or copying of this communication is strictly prohibited. If you think you have received this communication in error, please notify us immediately by reply e-mail or by telephone (800) 810-1736 and delete the original message.

This notice is required by IRS Circular 230, which regulates written communications about federal tax matters between tax advisors and their clients. To the extent the preceding correspondence and/or any attachment is a written tax advice communication, it is not a full "covered opinion." Accordingly, this advice is not intended and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS.