Families Get a $3,000 Child Tax Credit for 2021

President Biden signed the American Rescue Plan Act of 2021 (the "American Rescue Plan"), the latest package to help tackle the coronavirus pandemic and stimulate the economy. The legislation passed the House and Senate on a wholly partisan basis, supported only by Democrats. One provision in the American Rescue Plan expands the child tax credit for one year and makes it fully refundable.

For 2020 tax returns that you are filing this year, the child tax credit is worth $2,000 per kid under the age of 17 whom you claim as a dependent and who has a Social Security number. To qualify, the child must be related to you and generally live with you for at least six months during the year. The credit begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return. Up to $1,400 of the child credit is refundable for some lower-income individuals with children, but these people must also have earned income of at least $2,500 to get a refund.

The American Rescue Plan temporarily expands the child tax credit for 2021. First, 17-year-old dependents can qualify. Second, the credit is increased to $3,000 per child ($3,600 per child under age 6) for many families. Third, the $2,500 earnings floor is removed. Fourth, the credit is fully refundable. And fifth, half of the credit can be received in advance by having the IRS send periodic payments to families from July 2021 to December 2021.

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Phase-Out for Wealthier Parents

Not all families with children get the higher child credit for 2021. The enhanced tax break begins to phase out at AGIs of $75,000 on single returns, $112,500 on head-of-household returns, and $150,000 on joint returns. Families who aren't eligible for the higher child credit for 2021 would still claim the regular credit of $2,000 per child, less the amount of any monthly payments they got, subject to the $400,000/$200,000 AGI threshold limits.

Periodic Payments in 2021

Regarding the advance payments, the American Rescue Plan calls for the IRS to send out a check (mainly in the form of direct deposits) periodically from July 2021 through December 2021 to eligible families. The hope is that the IRS would send the payments monthly for a total of six advance payments. These payments would account for half of the family's 2021 child tax credit. For example, if monthly payments were made, this would result in payments of up to $250 per child ($300 per child under age 6) for six months and would be a nice windfall for many families. Take a family of five with three children ages 12, 7 and 5. Assuming the family qualifies for the higher child credit and doesn't opt out of the advance payments, they could get $800 per month from the IRS from July through December, for a total of $4,800. They would then claim the additional $4,800 in child tax credits when they file their 2021 return next year. (Use our 2021 Child Tax Credit Calculator to see how much you would get per month under the current plan.) To determine eligibility for the advance payments, the IRS would first look to the 2020 return. If a 2020 return has not yet been filed, the IRS would look to 2019 returns.

As discussed above, lawmakers expect the IRS to start making the advance child credit payments to eligible Americans in July, giving the agency just a few months' lead time to set up its computer systems to handle such a massive, but temporary, new payment program. The IRS is also tasked with developing an online portal so that individuals could update their income, marital status, and the number of qualifying children. People who want to opt out of the advance payments and instead take the full child credit on their 2021 return could do so through the portal.

Some Overpayments Would Not Have to Be Paid Back

With advanced payments of the child tax credit, there will sure to be instances in which families receive more in advanced child tax credit payments from the IRS than they are otherwise entitled to. And the American Rescue Plan contemplates this by providing a safe harbor for lower- and moderate-income taxpayers.

Families with 2021 an AGI below $40,000 on a single return, $50,000 on a head-of-household return, and $60,000 on a joint return won't have to repay any credit overpayments that they get. On the other hand, families with 2021 AGIs of at least $80,000 on a single return, $100,000 on a head-of-household return, and $120,000 on a joint return will need to repay the entire amount of any overpayment when they file their 2021 tax return next year. And families with 2021 AGIs between these thresholds will need to repay a portion of the overpayment.

Is the IRS Up for the Challenge?

Many tax experts and some lawmakers question whether the IRS, with its out-of-date computer systems, shrunken work force and its myriad of other duties, is fully able to deliver periodic child credit payments.

Setting up a new program to deliver regular payments to taxpayers who must meet complex eligibility requirements to qualify for the child credit will be a challenge for an agency that is not used to sending out periodic payments. The IRS would need more funding for such a big undertaking. The American Rescue Plan authorizes an additional $400 million for the IRS to take on the additional work, but some experts question whether this is enough. The IRS says that to facilitate advanced payments of the credit, it would have to build a system to compute and recompute payments as taxpayers provide new information. Such a system must also be able to issue and track payments, as well as to reconcile all payments sent out to each taxpayer during the year with the taxpayer's credit taken on the tax return. The agency would also need to develop a program that would flag returns that don't accurately include all advance payments received during the year.

Another issue that the IRS will have to deal with is how to minimize the potential for fraud when it comes to refundable child tax credits. For example, the IRS estimates that in 2019 it improperly paid $7.2 billion in such refundable credits.

Odds of the Expanded Child Tax Credit Becoming Permanent

Remember that the child tax credit expansion only applies for the 2021 tax year. Some Congressional Democrats would like to see the enhancements made permanent, touting the impact that a higher and fully refundable child tax credit would have on reducing child poverty in the United States. Democratic lawmakers have already introduced bills in the House and Senate to make permanent a fully refundable higher credit of $3,000 per child ($3,600 per child under 6) with advance payments of the credit. It's too soon to tell whether these changes will eventually be made permanent, but it could very well happen.