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The Child Tax Credit: Temporary Expansion for 2021 Tax Year

How does the child credit change in 2021 under the American Rescue Plan Act? The American Rescue Plan Act of 2021 (ARPA; P.L. 117-2) makes several temporary changes (for 2021 only) that expand the child tax credit, primarily for low-income taxpayers. These changes include. Expanding eligibility to 17-year-olds: The law increases the maximum age for an eligible child from 16 to 17.

Making the credit fully refundable: The law eliminates the ACTC phase-in based on earned income and eliminates the ACTC cap of $1,400 per child. Hence, the child credit is “fully refundable” and the full value is available to otherwise eligible taxpayers with no earned income. ·

Increasing the credit for low- and moderate-income taxpayers, with larger increases for younger children: The law increases the maximum amount of the credit from $2,000 per child to $3,600 per child for a young child (0-5 years old) and $3,000 per child for an older child (6-17 years old), as illustrated in the figures below. Generally, this increase in the maximum child credit of $1,600 per young child and $1,000 per older child gradually phases out at a rate of 5% as income exceeds specified thresholds until the credit amount equals the current-law maximum of $2,000 per child. These thresholds are $75,000 for single filers, $112,500 for the head of household filers, and $150,000 for married joint filers. (The actual income level at which the credit phases down to $2,000 per child depends on the number and age of qualifying children.) For many families, the credit then plateaus at its prior-law level of $2,000 per child and phases out when income exceeds the current law threshold of $200,000 ($400,000 for married joint filers). For larger families, the credit may never plateau at the $2,000 per child level, but simply continue to gradually phase-out. These changes will increase the amount of the credit for low- and moderate-income taxpayers, while higher-income families will generally receive the same benefit as under prior law (unless they have an eligible 17-year-old), as illustrated in the figures below. The Joint Committee on Taxation estimates this temporary one-year expansion of the child credit would cost $110 billion, mostly in FY2021 and FY2022 (these estimates also include the relatively smaller cost of permanently extending the credit to residents of U.S. territories).

RESEARCH, CONGRESSIONAL. “The Child Tax Credit: Temporary Expansion For … – Congress.” INSIGHT, https://crsreports.congress.gov/product/pdf/IN/IN11613.

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