by Trent Krassow
As we head into Summer 2021, the covid pandemic seems to be losing steam in the US, and places are opening up. One thing that is definitely opening up is the spigot at the US Treasury. Over the last 15 months, we have seen multiple "relief" bills, tax changes, and direct payments to citizens and businesses of all stripes. The spigot will again open up for families claiming the Child Tax Credit beginning in July 2021.
The Child Tax Credit has long been a part of the tax code, with low to medium income households able to get a pretty nice credit on their Federal taxes. The 2017 Tax Cuts and Jobs Act expanded eligibility for the credit, but to get the credit, you had to first file your taxes, and then wait for the IRS to process your return. If you owed money at tax time, the credit would reduce the amount you owed, and if you were getting money back, the credit might enhance that refund.
As part of the American Rescue Plan Act of 2021 - one of multiple covid 19 relief/stimulus packages passed at the Federal level- the Child Tax Credit was expanded from $2,000 per qualifying child under age 17 to up to $3,600 for children under age 6, and $3,000 for those ages 6-17 (17 included), but only for the 2021 tax year, after which it is set to return to the familiar $2,000 (though there are efforts within Congress to make this permanent.) But the Act also stipulated that up to half of the new credit was to be paid to eligible households throughout 2021, beginning in July and continuing through December. It is interesting that these payments begin as the economy is generally coming back to life and the covid restrictions are rapidly going away.
While the eligibility for the general Child Tax Credit (CTC) remains generous per the 2017 Tax Cuts and Jobs Act, the income thresholds for phaseout of the expanded credit for 2021 are much, much lower:
Status MFJ HoH Single
Normal CTC $400,000 $200,000 $200,000
Expanded CTC 2021 $150,000 $112,500 $75,000
So, how does this work? As always, an example or three might help clarify.
1. The Smith family has two young children, Amy and Alex, who are ages 5 and 3. The Smiths file a joint return each year and have Adjusted Gross Income of $80,000 for 2020, and expect roughly the same for 2021. Here is how their Child Tax Credits will work:
Child
Year Amy Alex At Tax Time During the Year
2020 $2,000 $2,000 $4,000 $0
2021 $3,600 $3,600 $3,600 $3,600
The Smiths will receive $3,600 of the credit from July through December of 2021 - or $600 per month for six months. They will then receive an additional $3,600 of credit when they file their 2021 tax return in the spring of 2022. Notice that Smiths will actually get less Child Tax Credit at tax time than they are accustomed to - $3,600 vs. the normal $4,000. This probably won't cause too much shell shock at tax time, but this could be an issue for some families if they end up owing at tax time because of this.
2. The Smiths' neighbors, the Changs, also have two small children, Johnny and Jenny, ages 5 and 7, and have similar income as the Smiths and file joint tax returns each year. In this case, the Changs get slightly less Child Tax Credit for 2021 than their neighbors. This is due to Jenny, their oldest child only qualifying for $3,000 of credit vs. $3,600 due to her age:
Child
Year Johnny Jenny At Tax Time During the Year
2020 $2,000 $2,000 $4,000 $0
2021 $3,600 $3,000 $3,300 $3,300
Notice that the gap between what the family usually gets in Child Tax Credits at tax time and what they will get when they file their 2021 return widens a bit, here - $3,300 vs. $4,000.
3. On the same street as the Smiths and Changs lives the Lopez family, also with two children - Steven and Arianna - ages 4 and 2. The Lopez family has an income of $175,000 and files a joint return. Because the family's Adjusted Gross Income is over $150,000, the expanded Child Tax Credit will be reduced, though the family will still receive the full normal CTC:
Child
Year Steven Arianna At Tax Time During the Year
2020 $2,000 $2,000 $4,000 $0
2021 $2,350 $2,350 $2,350 $2,350
The reduction is equivalent to $50 for every $1000 by which the Adjusted Gross Income exceeds the threshold:
$175,000 - $150,000 = $25,000
25 x $50 = $1,250 reduction in the expanded credit for each child
$3,600 - $1,250 = $2,350 total credits for each child
In this case, the Lopez family gets only $350 extra per child, but half of the total credit will still be paid out during the year. This means they will have a substantially lower credit at tax time, so this is where taxpayers need to be alert and manage their tax liability proactively. At an Adjusted Gross Income of $182,000, the extra CTC is fully phased out, but the normal CTC still applies. If the Lopez family had AGI of $182,000, they would simply receive the normal $2,000 per child to which they are accustomed.
These are simplistic examples, of course, and the reality is that we could come up with additional hypothetical scenarios - adding children, increasing income, changing the ages, etc. Which is to say, this is not a simple, straightforward tax benefit, and it is likely that this will cause some confusion both during the next few months and at tax time when millions of families file their 2021 returns. If you are confused about this or other tax matters or covid economic relief, feel free to contact us at 970-287-1818.