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2021 Child Tax Credit

The American Rescue Plan Act (ARPA), signed into law in March, caused significant changes to the Child Tax Credit (CTC) for most taxpayers in 2021. Understanding The American Rescue Plan Act can be confusing. Below outlines some questions that may arise.

If you feel that you are in a situation that makes you feel uncertain about what you should do, please call one of our offices.

1. What is the Child Tax Credit (CTC)?

  • The CTC is a credit given when filing an individual income tax return to help offset the cost of raising children.  The credit will reduce the amount of income tax due and can potentially get extra money back if you are due a refund.

2. What has changed with the CTC?

  • The amount of the CTC has increased to $3,000 per child for ages 6-17, and $3,600 per child under the age of 6 as of December 31, 2021.
  • In the past, up to $1,400 per child was refundable.  The ARPA has now made the expanded CTC fully refundable when filing the 2021 tax return.
  • The minimum income requirement has been removed.  You can now have zero income and still qualify for the CTC.
  • The ARPA has provided an opportunity to receive monthly advanced payments, that are equal to half of the credit amount, between July and December 2021. 
  • The rate that the new expanded CTC will gradually start to phase out has been lowered to $75,000 for single filers, $150,000 for married couples, and $112,500 for head of household filers.

3. How do I get the advanced payments and when do they start?

  • Households with a qualifying child(ren) are eligible to receive the advanced CTC payments.  If the 2019 or 2020 tax return has been filed, nothing needs to be done in order to receive the advanced payments.  The advanced payments will start July 15, 2021, and run through December 2021.

4. What if I haven’t filed a 2019 or 2020 tax return, do I still qualify?

  • The IRS has provided a Non-Filer portal which allows users to update information and register for the advanced payments. 

5. What if I don’t want to receive the advanced payments?

  • The IRS has another portal called the Child Tax Credit Update Portal that allows for taxpayers to opt out of receiving the payments.  If you choose to unenroll in the payments, the deadline is at least three (3) days before the first Thursday of the next month.  At this time, if you have unenrolled, you may not be able to re-enroll until late September 2021. 

6. Are these advanced payments considered income?

  • No, this is not income.  It is an advance of the 2021 CTC that you would normally claim on your 2021 tax return.  The IRS will send you Letter 6419 that will report the amount of the advanced payments you receive.  PLEASE KEEP THIS LETTER AS IT WILL BE NEEDED TO PREPARE YOUR TAX RETURN ACCURATELY.

7. Are these changes permanent?

  • As of right now, this is only for tax year 2021.  However, proposals have been made to make these changes stay in effect for a longer period of time.

2018 Tax Changes

The following is a brief overview of the Tax Cuts & Jobs Act affecting individuals

Tax Rates and Brackets:  TCJA provides seven tax brackets, with most rates being two to three points lower than the ones under present law (the top rate goes from 39.6 percent to 37 percent).  The top rate kicks in at $600,000 of taxable income for joint filers, $300,000 for married taxpayers filing separately and $400,000 for all other individual taxpayers.

Capital Gain Rates and Net investment Income Tax:  Tax rates on capital gains and the 3.8 percent net investment income tax (NIIT) are unchanged by TCJA.

Personal Exemptions and Standard Deduction:  TCJA repeals the personal exemption deductions, but nearly doubles the standard deduction amounts to $24,000 for joint filers and surviving spouses, $18,000 for heads of household and $12,000 for single individuals and married filing separately (additional amounts for the elderly and blind are retained).

Exemption for Dependents and Child Tax Credit:  as part of the repeal of personal exemption deductions, TCJA repealed exemptions for dependents.  To compensate, TCJA increases the child tax credit to $2,000 ($1,400 is refundable), up from $1,000 (fully refundable) under present law.  The modified adjusted gross income threshold where the credit phases out is $400,000 for joint filers and $200,000 for all others (up from $230,000 and $115,000, respectively).  The maximum age for a child eligible for the credit remains 16 (at the end of the tax year).

TCJA also provides a $500 nonrefundable tax credit for dependent children over age 16 and all other dependents.  Most families with non-child dependents will lose some ground here, as the $500 credit will generally be less valuable than the $4,150 exemption deduction it replaces.

Other Tax Breaks for Families Unchanged:  The child and dependent care expenses credit, the adoption credit and the exclusions for dependent care assistance and adoption assistance under employer plans are all unchanged by TCJA.

Pass-through Tax Break:  TCJA creates a new 20 percent deduction for qualified business income from sole proprietorships, S corporations, partnerships and LLC's taxed as partnerships.  The deduction, which is available to both itemizers and nonitemizers, is claimed by individuals on their personal tax returns as a reduction to taxable income.  The new tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $157,500 ($315,000 for joint filers) are simpler and more permissive than the ones that apply above those thresholds.

Example:  In 2018, Joe receives a salary of $100,000 from his job at XYZ Corporation and $50,000 of qualified business income from a side business that he runs as a sole proprietorship.  Joe has no other items of income or loss.  Joe's deduction for qualified business income in 2018 is $10,000 (20 percent of $50,000).

Deduction for State and Local taxes (SALT):  TCJA imposes a $10,000 limit on the deduction for state and local taxes, which can be used for both property taxes and income taxes (or sales taxes in lieu of income taxes) and repeals the deduction for foreign property taxes.  There is no limit on the amount of the SALT deduction under present law.

Mortgage Interest Deduction:  TJCA reduces to $750,000 (from $1 million) the limit on the loan amount for which a mortgage interest deduction can be claimed by individuals, with existing loans grandfathered.  TCJA also repeals the deduction for interest on home equity loans.

Deduction for Medical Expenses:  An early version of the tax overhaul passed by the House would have repealed the deduction for un-reimbursed medical expenses.  TCJA retains that deduction and enhances it for 2017 and 2018 by lowering the adjusted gross income (AGI) floor for claiming the deduction from 10 percent to 7.5 percent for all taxpayers.

Deduction for Casualty and Theft Losses:  TCJA repeals the deduction for casualty and theft losses, except for losses incurred in presidentially declared disaster areas.

Deductions for Charitable Contributions:  TCJA retains the charitable contribution deduction and increases the maximum contribution percentage limit from 50 percent of taxpayer's contribution base to 60 percent for cash contributions to public charities.

Deduction for Certain Miscellaneous expenses:  TCJA repeals the deduction for any miscellaneous itemized deductions subject to 2-percent of AGI floor.  this includes employee business expenses you may incur.

Repeal of Alimony Deduction:  TCJA repeals the deduction for alimony paid and the corresponding inclusion in income by the recipient, effective for tax years beginning in 2019.  Alimony paid under separation agreements entered into prior to 2019 will generally be grandfathered under the old rules.

Education-Related Tax Breaks Preserved:  TCJA retains deductions for student loan interest and educator expenses, and also exclusions for graduate student tuition waivers and employer educational assistance programs.

Alternative Minimum Tax:  TCJA increases alternative minimum tax (AMT) exemption amounts by 27 percent and sharply increases the income level where the exemption is phased out.  Combined with the effects of other TCJA changes, many individuals who are currently subject to AMT in 2017 will not be in 2018 and beyond.

Expanded Uses for 529 Plan Distributions:  TCJA allows up to $10,000 in aggregate 529 distributions per year to be used for elementary and secondary school tuition.  Under present law, 529 distributions can only be used for higher educations expenses.

Repeal of Individual Healthcare Mandate:  TCJA repeals the tax penalty on individuals who fail to carry health insurance enacted as part of the affordable Care Act (ACA).  This does not start until January 1 of 2019.  For 2018 filing in 2019, you will still have a penalty for not having health insurance unless you meet the exceptions to have that penalty excluded based on current law.

Estate and Gift Tax Exclusion: TCJA permanently doubles the basic exclusion amount for estate and gift tax purposes from $5.6 to $11.2 million.  A provision fully repealing the estate tax beginning in 2025 was passed by the House, but did not make it into TCJA, so the estate tax will remain in effect with the higher exclusion amount.