ARPA expands tax credits for families.

• Author: Adkins, Nell
• Position: American Rescue Plan Act of 2021

The American Rescue Plan Act (ARPA) (1) increased several tax credits to extend financial aid to qualifying taxpayers and allow additional taxpayers to benefit from them. Chief among them are the child tax credit (CTC) and the child and dependent care credit (CDCC). These enhancements to the CTC and CDCC--including their full refundability--are temporary, currendy applying to tax year 2021 only.

Child tax credit

In late 2017, the legislation known as the Tax Cuts and Jobs Act (2) updated the amount of the CTC from $1,000 per qualifying child to $2,000 per qualifying child and expanded its phaseout range for years 2018 through 2025. (3) For 2021, ARPA increases the amount of the credit to $3,000 per qualifying child and to $3,600 per qualifying child younger than 6 years old. In reaching the $3,000 (or $3,600) credit amount, ARPA grafts an additional credit of $1,000 (or $1,600) onto the base credit of $2,000 already provided in Sec. 24. (4) ARPA further provides a separate limitation and phaseout for this additional credit. The basic differences between the CTC with and without ARPA are summarized in the chart "CTC Changes" on the next page.

A two-step phaseout

The phaseout of the $2,000 CTC base credit (5) for tax year 2021 remains much the same as before ARPA. The $2,000 credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income (MAGI) over the applicable thresholds of $400,000 (married filing jointly (MFJ)) and $200,000 (all other filing statuses). The base $2,000 credit is phased out to $0 when MAGI exceeds $439,000 ($239,000 for others).

The phaseout of the additional $1,000 (or $1,600) credit begins when taxpayers'MAGI exceeds $150,000 (MFJ), $112,500 (head of household (HH)), and $75,000 (others). (6) Thus, taxpayers filing jointly with MAGI of less than $150,000 are entitled to the full credit with no phaseout in 2021. This additional credit amount applies first and is also reduced by $50 for every $1,000 of MAGI over the applicable thresholds.

Example 1: Z and Tare married and file jointly in 2021. They have one qualifying 2-year-old child and $175,000 of MAGI. Of the additional $1,600 credit, $1,250 is phased out ([($175,000 - $150,000) + $1,000] * $50), as their MAGI exceeds the $150,000 threshold. None of the base $2,000 credit is subject to phaseout, as their MAGI is less than $400,000. Z and Tare entitled to a $2,350 CTC ($350 + $2,000). Z and T's CTC under identical facts for 2020 would be $2,000.

The additional credit amount of $1,000 for children over age 5 is phased out to $0 when MAGI exceeds $169,000 ($131,500 for HH and $94,000 for others). If the additional credit amount is for a child younger than age 6, the $1,600 additional credit amount is fully phased out once MAGI exceeds $181,000 for MFJ ($143,500 for HH and $106,000 for others).

Example 2: Z and T are married and file jointly in 2021. They have one qualifying 2-year-old child and $185,000 of MAGI. For the additional credit, all of the potential $1,600 is phased out, as their MAGI exceeds $181,000. None of the base credit is subject to phaseout, as their MAGI is less than $400,000. Z and Tare entitled to a $2,000 CTC ($0 + $2,000). For higher-income taxpayers--MFJ taxpayers with MAGI over $400,000 ($200,000 others), the base credit amount of $2,000 phases out. The phaseout is complete once MAGI exceeds $439,000 for MFJ ($239,000 for others).

Example3: Z and Tare married and file jointly in 2021. They have one qualifying 2-year-old child and $425,000 of MAGI. For the potential additional credit, all $1,600 is phased out, as their MAGI exceeds $181,000. The base ($2,000) portion of the credit is also subject to phaseout, as their MAGI exceeds $400,000. The phased out amount is $1,250...