Understanding the New Expanded Child Care Tax Credit

This column will explain to what is currently known about the expanded child tax credit, most important of which is when it becomes effective and which individuals qualify for the expanded credit.

Edward A. Zurndorfer–

The American Rescue Plan Act of 2021 (ARPA) includes provisions temporarily expanding the child tax credit (CTC). The CTC has been around since the Clinton Administration. This new version of the CTC for 2021 expands the existing CTC and hopefully will have a positive effect on Americans trying to find financial stability through the COVID-19 pandemic.

As with all new legislation passed into law, there are several moving parts associated with the expanded CTC and including who qualifies as a qualifying child. This column will explain to what is currently known about the expanded child tax credit, most important of which is when it becomes effective and which individuals qualify for the expanded credit.

The New Expanded CTC is Available Only for 2021

The new expanded CTC is currently available to individuals only for the year 2021 and only for individuals and families who qualify. The new expanded CTC will be $3,600 per child under age 6 for eligible individuals (either single parents or married couples). For children ages 6 to 17, the credit is $3,000 per child. It is important to note how the credit will be paid to qualifying individuals during 2021. In particular, half of the credit will be paid monthly to qualifying individuals via direct deposit in their bank accounts from July through December 2021 and the other half of the credit will be treated as an adjustment to the qualifying individual’s gross income on the individual’s 2021 Federal income tax return) (thereby decreasing the AGI and lowering their taxable income).

During the months of July through December 2021, the IRS will deposit the CTC into the qualifying individual’s bank account – $300 for each child under age six and $250 for each child aged 6 to 17 (the same bank account the individual used for direct deposit of refunds or to pay a balance due on the individual’s 2020 federal income taxes). The remaining 50 percent of the credit ($1,800 and 1,500) will then be an adjustment (deduction) to the gross income on the eligible individual’s 2021 federal income tax return to be filed in the spring of 2021.

Note that the new CTC is part of the existing CTC of $2,000 per child, subject to adjusted gross income “phaseout” rules, as is explained below. The existing CTC is obtained when an individual’s files current year taxes.

The New Expanded CTC is Subject to an Income “Phase-out”

Like the stimulus checks for the COVID-19 pandemic, the new CTC will be based on an individual’s adjusted gross income (AGI). For single individuals, that is an AGI limit of $75,000 or less; for head of household filers that is an AGI limit of $112,500 or less, and for those filing married filing joint there is an AGI limit of $150,000 or less. There is a “phaseout” of the new CTC but only applies to the temporarily expanded amounts available only during 2021 ($1,600 per child under age six and $1,000 per child aged 6 to 17 as of Dec. 31, 2021). For every $1,000 an individual’s AGI (or fraction thereof), exceeds the appropriate threshold, the individual’s expanded CTC amount will be reduced. But individuals who are not eligible to claim an increased CTC in 2021 can claim a regular CTC ($2,000 for each child under 17) for 2021, subject to the existing phaseout rules. Single or head of household filers are eligible for regular $2,000 CTC if their AGI is below $200,000 while married filing joint filers can claim the $2,000 CTC if their AGI is below $400,000.  The following example illustrates:

Jan files as head of household with one child and an AGI of $140,000 during 2021. Her child is age 10. Jan therefore qualifies for an expanded CTC of $3,000. However, the increased portion of Jan’s CTC ($1,000) is completely phased out as shown here:

$140,000 less $112,500 equals $27,500

$27,500 /$1,000 equals 27.5 rounded up to 28.00

28.00 times $50 equals $1,400 reduction of credit limited to $1,000.

This means that Jan does not qualify for the expanded $1,000 CTC for her child aged 10. But Jan is eligible for the full $2,000 CTC.  

How Does an Individual Qualify for the Expanded CTC?

The new CTC is a 2021 tax credit and will be based on an individual’s 2021 AGI. However, in order to accelerate providing relief to individuals, the IRS will look at an individual’s 2020 AGI as they did with the stimulus checks when they looked at individual’s 2019 AGI. If an individual has not filed his or her 2020 returns, the IRS will look back to the individual’s 2019 AGI. Since the new CTC is an AGI-based program, if an individual’s 2020 income is within the AGI to qualify but their 2021 income exceeds the limitations and phase-out, the individual will need to pay back the credit on their 2021 federal income tax return.

Things to Note Concerning the Expanded CTC for 2021

1. Situations where a child hits his or her age threshold. Since the expanded CTC is based on AGI and age, there will be situations in which a child changes age threshold during 2021. For example, if an individual’s child becomes age 6 before the end of 2021 they qualify for the $3,000 credit and not the $3,600 credit. Similarly, if a 17-year-old becomes age 18 before the end of 2021 the 17-year-old’s parents will be eligible for a $500 CTC for 2021.
2. The existing CTC will continue to be available. There will be many individuals who will not qualify for the new CTC because their AGI will be too large in 2021. However, the CTC that was established as part of the Tax Cuts and Jobs Act of 2017 (TCJA) will still be available. This CTC is a $2,000 tax credit for single individuals with a MAGI of $200,000 or less and individuals filing married filing joint with an AGI of $400,000 or less. This group of individuals will still qualify for a $2,000 tax credit for each child under age 17 and a $500 tax credit for dependents over age 17.
3. The CTC is a fully refundable tax credit. The CTC is fully refundable for 2021 for an individual (spouse for a joint return) with a principal place of abode in the U.S. for more than half of the year. This means that an individual is eligible for the CTC without regard to whether or not the individual has a federal tax liability for 2021 that is less than the amount of the CTC he or she is entitled to.

Child Care Tax Credit