The American Rescue Plan passed in March 2021 brought about some big changes for the child tax credit, including:
- The credit amount is increased from $2,000 to $3,000 for each child age 6 to 17*.
- The credit amount is increased from $2,000 to $3,600 for each child under age 6.
- The credits are fully refundable. Previously, you could only claim the credit to the extent you had a tax liability. Now, you can claim the credit, even if you don’t have a tax liability.
- One-half of your estimated child tax credit will be paid in advance payments from July – December 2021, and the remainder will be credited with your 2021 return. If you do not want the advance payments, you can opt-out and claim the full credit when you file your 2021 taxes.
*The child tax credit is typically for children age 16 and under; for 2021 it was expanded to include 17 year olds.
Right now, the child tax credit changes are only for 2021, but the Biden administration has proposed to keep the expanded credit amounts through 2025 and would like to make the credit fully refundable permanently.
The increased tax credit amounts phase out based on income levels. For each $1,000 a taxpayer exceeds the income thresholds below, the credit is reduced by $50:
- $150,000 for Married Filing Jointly Taxpayers
- $112,500 for Head of Household Taxpayers
- $75,000 for all other Taxpayers
Taxpayers whose income exceeds these limits are still eligible for the regular child tax credits ($2,000 per child). The regular child tax credits begin to phase out at the following income levels:
- $400,000 for Married Filing Jointly Taxpayers
- $200,000 for all other Taxpayers
The IRS will use your 2020 tax return to estimate the child tax credit for your family.
Unlike the stimulus payments paid out in 2020 and 2021, you may have to pay back some of your tax credit if your income ends up above the limits or if your dependents and/or filing status changes.
Child tax credit examples
Example – Refundable credits: June and Luke file married filing jointly and have two daughters, Hannah and Nichole. Hannah is 10 and Nichole is 1. In 2020, they received a $2,000 tax credit for each child ($4,000 total). Their 2020 federal income tax was $3,800, and they did not pay any tax during the year. Their $4,000 tax credit offset their $3,800 income tax, but they did not receive a refund for the $200 extra.
In 2021, they will get a $3,000 tax credit for Hannah and a $3,600 credit for Nichole ($6,600 total). Their 2021 federal income tax is $6,000 and they did not pay any tax during the year. They opted out of the advance tax credit payments. Their child tax credit of $6,600 will completely offset their tax of $6,000, and they will get a refund of $600.
Example – income in excess of threshold and advance payments: Serena files as head of household and has one infant son. In 2020 and 2021, her income was $120,000, which is over the expanded child tax credit income threshold of $112,500. A portion of her credit is phased out, and her reduced child tax credit amount is $3,225. Half of this amount ($1,613) will be paid from July – December 2021 in equal payments of $269 per month. The other $1,612 will be claimed on her return as a credit to offset her 2021 tax.
Example – excess advance payments: Emily and Sylvia filed married filing jointly and claim their son Oliver, who is 7. Their income on their 2020 return was $135,000. In 2021, Emily’s company has a liquidity event and she receives a large payout, putting her income over $500,000 for the year. Based on their 2020 return, they received advance child credit payments of $250/month from July – December 2021 or $1,500 total. When they file their 2021 return, they realize their actual child tax credit for 2021 should have been $0 because their income is more than the threshold; they must pay back the $1,500 of advance credit they received.
Opting Out of Advance Payments
You may want to opt out of the advance payments if-
- There has been a large increase in your income from 2020 to 2021.
- You will be claiming fewer dependents under age 18 in 2021
- You had a change in filing status (for example, going from Married Filing Jointly to Head of Household).
- You prefer to receive the credit all at once, when you file, instead of in smaller, monthly amounts.
To opt out of the advance payments, go to the IRS online portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.
A few things to be aware of with the opt-out portal:
- So far, many taxpayers have found the opt-out process to be cumbersome. It involves setting up an IRS or ID.me account if you do not already have one.
- If you file taxes as married filing jointly, both you and your spouse will need to go through the opt-out process.
- You can opt out any time to stop receiving the monthly payments. You must opt out three days before the first Thursday of the month to stop the next month’s payment. Once you opt out, you will not receive any payments for the rest of 2021. Beginning in September 2021, you will have the option to opt back in to receiving payments.