Advance child tax credits.

• Author: Ward, Kelly

With the enactment of the American Rescue Plan Act (ARPA), P.L. 117-2, in March 2021, important changes were introduced to the child tax credit (CTC). These included that the amount increased for certain taxpayers, the definition of qualifying children expanded, the credit became fully refundable, and an advance CTC payment program was introduced.

It is important to note that these changes are temporary and apply to only the 2021 tax year. They also may present preparers with important cash flow and financial planning opportunities if acted on timely, which can also help clients avoid surprises during the 2021 tax return preparation season. The monthly advance CTC is the most novel modification; the credit is normally part of a taxpayer's income tax return.

Under Sec. 24(i)(2), the definition of a qualifying child is expanded to include a child who has not attained the age of 18 as of the end of the 2021 calendar year. Sec. 24(i)(1) makes the CTC fully refundable for taxpayers with a principal place of abode in the United States for more than half of the 2021 tax year (or who are bona fide residents of Puerto Rico). Taxpayers may be eligible for the refundable credit even without having earned income.

The CTC amount is up to $3,000 for each qualifying child between the ages of 6 and 17 as of the end of 2021 and $3,600 for each child under the age of 6 at the end of the calendar year.

The CTC phases out in two ways based on the taxpayer's modified adjusted gross income (MAGI) in 2021. Taxpayers can receive the full credit if their MAGI does not exceed $150,000 for married-filing-jointly (MFJ) or surviving spouse filers, $112,500 for head-ofhousehold (HOH) filers, or $75,000 in any other case. At higher income levels, the first phaseout reduces the credit by $50 for each $1,000 (or remaining part thereof) of MAGI. However, taxpayers filing jointly with no more than $400,000 in MAGI, or $200,000 in any other case, can receive the same CTC amount as under prior law, $2,000 per qualifying child. The second phaseout reduces the remaining CTC by $50 for each $1,000 (or remaining part thereof) by which taxpayers' MAGI is above these higher income limits.

ARPA also introduced Sec. 7527A to provide the advance payments program, which allows eligible taxpayers to receive 50% of the estimated CTC amount for which they are eligible on the 2021 tax return by periodic advance payments. Taxpayers generally do not need to take any action to receive the...