Child Tax Credit 2021: Qualifications, Phase-outs, and More Stimulus Updates

Congress passed the American Rescue Plan Act of 2021 (ARPA) in early March 2021, implementing dozens of changes to the U.S. economy. Among these updates is an expanded and enhanced child tax credit (CTC), which offers a more generous—and flexible—benefit for qualifying parents and guardians. Here’s what you need to know about CTC adjustments.

What is the Child Tax Credit (CTC)?

According to the IRS, the child tax credit (CTC) is a credit that parents and guardians can claim on their taxes if they claim a child as a dependent when filing Form 1040. Claimants must also have earned income totaling at least $2,500 in the applicable tax year.

To claim the CTC, the child must meet certain conditions. These include: 

1. The child is the son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half brother, half-sister, or a descendant of any of them (for example, the claimant’s grandchild, niece, or nephew).
2. The child was under age 17 at the end of the applicable tax year.
3. The child did not provide over half of his or her own support for the applicable tax year.
4. The child lived with the claimant for more than half of the applicable tax year.
5. The child is claimed as a dependent on the claimant’s return. 
6. The child does not file a joint return for the year (or files it only to claim a refund of withheld income tax or estimated tax paid).
7. The child was a U.S. citizen, U.S. national, or U.S. resident alien. 

In 2020, the CTC was calculated at $2,000 per child, per year—a sum that was delivered to qualifying households upon filing their returns. Up to $1,400 of the CTC is refundable.

What Changes Were Made to the Child Tax Credit?

1. Higher Possible Child Tax Credit Amount

Thanks to ARPA’s passage, qualifying households with children under the age of 6 can receive an annual CTC of $3,600 per child and $3,000 per child between ages 6 and 17 through 2021. This temporary credit is also fully refundable and the earned income requirement has been suspended.

However, not all households claiming children as dependents can claim the enhanced CTC. An analysis published by The National Law Review indicates that “the CTC will effectively have 2 sets of phase-outs”: 

1. The expanded CTC applies to households with a modified adjusted gross income up to $75,000 for single filers and up to $150,000 for married filers.
2. The existing CTC of $2,000 per child remains in place for individuals who make up to $200,000 and married couples who make up to $400,000. 

2. Option to Receive Child Tax Credit in Monthly Installments

According to an article reported by CNET, the bill also adjusted how qualifying households access the CTC. Now, claimants can receive the CTC funds in monthly installments versus one lump sum payment during tax season. Payments will equal up to $300 per month for every qualifying child age 5 and younger and up to $250 for every qualifying child between the ages of 6 and 17. 

The same National Law Review analysis referenced above explains how the credit will be distributed:

... the IRS will make monthly payments from July 2021 through December 2021 amounting to ½ of the CTC, and the remaining half will be realized when claimed in the spring of 2022 when the taxpayer files the 2021 tax return.

In a separate piece published by CNET, writer Katie Conner clarifies why the CTC payments will be split between 2021 and 2022: The first half is considered an "advance payment" for parents to use immediately while the second portion applies to 2021 taxes, which are filed in 2022. 

Additionally, a piece in Forbes points out that the IRS will determine eligibility for the new CTC using either 2019 or 2020 tax return data—whichever is most recent.

Is the New CTC Permanent?

No, the enhanced tax credit is currently only available until the end of the year. 

However, per a news story from CBS News, policy experts hope “that lawmakers may extend the expansion, especially if it proves popular with voters.”

How Will the Expanded CTC Help Employees?

For the parents and guardians, this expanded CTC means yet another critical boost to their pocketbooks—particularly when combined with after another round of direct economic payments were delivered to qualifying Americans. The expansion could also be good for the economy as a whole as well. 

A study from the Center on Poverty & Social Policy at Columbia University said that while the program costs about $100 billion, it “would generate about $800 billion in benefits to society.” Other programs implemented by ARPA are designed to help out struggling households and industries, including the Restaurant Revitalization Fund, free temporary COBRA coverage, and more.

Employers and employees should also note that the IRS extended the tax filing day to May 17, 2021. The original deadline was April 15, 2021.