2021 TAX FILING

What triggers the Additional Child Tax Credit?

The American Rescue Plan expands the Child Tax Credit making it fully refundable for taxpayers in 2021. This year’s tax return, the old rules still apply.

What triggers the Additional Child Tax Credit?
SPENCER PLATT AFP

By enhancing the Child Tax Credit, child poverty could be reduced by nearly half in the United States. The enhanced credit will make the whole of the enlarged credit refundable in 2021. But taxpayers, on 2020 income-tax filings, can expect a more limited tax benefit under the current rules.

The current rules were established under the 2017 Tax Cut and Jobs Act which is in effect until 2025. The current Child Tax Credit provides families with a tax credit of $2,000 per child, but only $1,400 of that is refundable. That refundable portion is known as the Additional Child Tax Credit but filers aren’t necessarily entitled to the whole of the refundable portion.

How does the Child Tax Credit work?

Raising children is an expensive proposition and to help families the tax code provides a credit per child under the age of 17 that families can claim at the end of the tax year. Under the last revision of the tax code in 2017, the Tax Cut and Jobs Act (TCJA) doubled the credit to $2,000 per child. The TCJA allows for $1,400 per child to be refundable, so that if a taxpayer owed less than the amount, it would be added to their tax refund.

But there are eligibility limits to receive the credit. A filer claiming the credit would need to earn at least $2,500 to begin to be eligible for the credit. Above that earnings floor a taxpayer can claim 15% of their taxable income, and then subtract the credit from any taxes they owe. If the amount of the credit they can claim is greater than the amount of taxes they owe, that excess amount would be added on to their refund.

To make a claim for a refund, filers must complete Schedule 8812.

Will I be able to claim the enhanced child tax credit in 2021?

In the American Rescue Plan, half of the enhanced child tax credit will be paid out in direct payments in 2021, similar to how the $1,400 stimulus checks in the same bill. The rest of the credit would have to be claimed on a taxpayer’s tax return next year.

Families could receive a payment of $300 per child under 6 and/or $250 per child under 18. The provision calls for the payments to go out monthly starting 1 July, through December. The remainder, $1,800/$1,500, would be available to families as a rebate when they file their 2021 income-tax filing in 2022.

Payments may be paid at longer intervals, it is up to the Secretary of the Treasury, Janet Yellen, to determine if monthly payments are feasible for the IRS to make. However, families could also opt to receive the credit in a lump sum when they file their income-tax return in 2022. The agency will also be tasked with setting up an online portal to allow families to change their status as their financial or family situation changes.