Changes to the Child Tax Credit & the Child and Dependent Care Tax Credit

On March 11, 2021, the American Rescue Plan Act was signed into law by President Biden. Two important changes included significant updates to the Child Tax Credit and the Child and Dependent Care Tax Credit.

Child Tax Credit

Amount of Credit and Income Limits

The Child Tax Credit was increased for 2021 from $2,000 to $3,000 per child and $3,600 per child under the age of 6. In addition, the age limit was raised from 16 to 17 years old. The full additional credit of $3,000/$3,600 is available for Adjusted Gross Income (AGI) of less than $75,000 for filing status single (S), $112,500 filing status Head of Household (HOH) and $150,000 Married Filing Joint (MFJ). The credit is phased out for incomes over these limits. The old credit of $2,000 per child is still available to those with AGI below $400,000 (MFJ) or $200,000 (S or HOH) and income above those levels start to phase out the credit to zero.

Advance Payment

The IRS will calculate your Child Tax Credit using the above thresholds from your 2020 tax return (if filed) or your 2019 tax return (if 2020 has not been filed yet). Taxpayers will receive half of the calculated credit in monthly installments through the second half of 2021 starting on July 15, 2021 and the remaining half of the credit will be claimed on their 2021 tax return. For example, if a married couple has two children ages 4 and 10 with AGI of $120,000 they would qualify for a credit of $6,600 ($3,600 for the 4-year-old and $3,000 for the 10-year-old). They would receive six monthly payments of $550 and they would claim the remaining $3,300 of credit on their 2021 tax return.

Opt Out of Advance Payments or Update Changes to Your Family or Income

Some families eligible for the payments may decide that, rather than receive the money now, they would prefer to wait and claim the entire tax credit when they file their 2021 taxes next year. Families who tend to owe money to the IRS when they file their taxes or those who make estimated tax payments may want to use the full credit next year, as opposed to getting half of it in advance, because the advance payments they receive might have to be repaid when filing their 2021 tax return. The IRS has created a Child Tax Credit Update Portal where taxpayers can Opt Out of receiving these Advanced Payments. Eventually this portal will allow you to update your income, marital status, and number of qualifying children. You will also be able to update your mailing address and bank account information.

Filing 2021 Tax Returns

The 2021 tax return will reconcile the amount of the Child Tax Credit you are entitled to and the amount of advanced payments you received during the year. The IRS will mail out a notice by January 31, 2022, showing the total amount of payments made to you during 2021. Please keep this letter and provide it to us with your documentation to prepare your 2021 tax returns.

Child and Dependent Care Tax Credit

Eligible Expenses

The credit is calculated by multiplying eligible childcare expenses by a percentage based on your income. Eligible expenses include daycare, preschool, household employees and day camps for children under the age of 13. The eligible expenses for the credit were increased from $3,000 for one child and $6,000 for two or more children to $8,000 for one child and $16,000 for two or more children. Both spouses on a jointly filed return must have earned income in order to claim this credit.

Income Limits and Percentage Used to Calculate the Credit

The maximum percentage for 2021 is bumped up from 35% to 50%. The phase-out structure has also changed: instead of the credit percentage starting to decrease when AGI exceeds $15,000, it will now not be reduced until AGI reaches $125,000. The percentage is gradually reduced from 50% to 20% for people with an AGI between $125,001 and $183,001. It stays at 20% for families with an AGI from $183,001 to $400,000, but then it is reduced again from 20% to 0% for taxpayers with an AGI above $400,000. If your AGI is above $438,000, you will not get a credit. When combined with the 50% maximum credit percentage, the highest credit amount available for this tax year is $4,000 if you have one child and $8,000 for two or more children.

At this time, the changes only apply to the 2021 tax year.