COVID-19: Additional Resources

Tax Credits Under the American Rescue Plan

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Summary

The American Rescue Plan expanded both the Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCC) to allow more families to access relief through these tax credit programs.

The CTC provides a tax credit to families with children under the age of 18. Under the Plan, the credit amount increased from $2,000 for all children to $3,600 for children under age 6, and $3,000 for other children under age 18. It is also a fully refundable credit for tax season 2021. Families can access 50% of the credit now in monthly payments (known as an advance credit) and the other half next year (after filing taxes). The IRS established the Child Tax Credit Update Portal, an online portal for taxpayers to update relevant data for mid-year payment adjustments (for example, the birth of a child during 2021).

The CDCC is a different tax credit program from the CTC. CDCC is designed to provide relief to families who have work-related expenses to care for a child under 13 or other qualifying person. Under the Plan, for tax year 2021 (filed in 2022), the maximum amount of the CDCC is 50% of the taxpayer’s work-related expenses (an increase from 35%). This percentage will vary depending on the taxpayer’s adjusted gross income, or AGI, (including a spouse’s income if a filing a joint return). Qualifying expenses are capped at:

  • $8,000 (increased from $3,000) for one qualifying person;
  • $16,000 (increased from $6,000) for two or more qualifying individuals.

Below are additional details.

Child Tax Credit (CTC) Under the American Rescue Plan

DESCRIPTION OF THE CTC UNDER THE AMERICAN RESCUE PLAN

The Benefit (Credit) Amount

The Child Tax Credit (CTC) is federal tax credit for households with dependent children under 17. Under the American Rescue Plan (ARP), the amount of the credit has been increased from $2,000 to:

  • $3,600 for each child under the age of 5 and
  • $3,000 for each child between the ages of 6-17.

The benefit amount is based on two primary sources of information:

  • 2020 tax return information (or 2019 return), and
  • Any updated information provided to the IRS in calendar year 2021, including information the taxpayer provided through the Child Tax Credit Update Portal.

Benefit Phase Out

The amount of the credit may be reduced if the households’ adjusted gross income (AGI) is between:

  • $150,000 – $400,000 if married and filing a joint return;
  • $112,500 – $200,000 if filing as head of household;
  • $75,000 – $200,000, if a single filer or are married and filing a separate return.

The credit is completely phased out if married and filing a joint return with AGI above $400,000 and AGI above $200,000 for all others.

Accessing the Payment

The child tax credit amount is an advance credit on next year’s tax refund for eligible taxpayers.

The total amount the taxpayer is eligible for is divided in half to allow families to access 50% of the credit now (known as an advance credit) and the other half next year (after filing taxes). Eligible households will receive these credits on the 15th of each month for 6 months, July through December 2021. Additional payments will be calculated next year when households file 2021 taxes (in 2022).

Case Example

Cathy has two children – Sara, 4 years old and Ben, 7 years old. She meets the eligibility requirements of the CTC and is eligible for the full credit amount as follows: $3,600 for Sara and $3,000 for Ben.
Her advance child tax credit amount would be calculated at $550 per month ($300 per month for Sara and $250 per month for Ben) through December 2021.
In calendar year 2022, when Cathy files her 2021 tax return, if eligible, she would receive the remaining 50% of the CTC.

Note

For married taxpayers who file jointly, when opting out of the advance CTC payments, both spouses must do so separately. If only one spouse opts out, the other spouse will receive half of the advance CTC payment.

Overpayment and Payment Protection

If a taxpayer receives more money than they are eligible for, they will need to pay the IRS the difference based on the tax return filed in 2022. However, there is a repayment protection program that may protect income-eligible families from repaying the extra money they received.

Note

In January 2022, the IRS will send Letter 6419 which provides information on the total amount of Advance Child Tax Credit payments that were disbursed during 2021. Taxpayers are advised to keep this letter for reference when filing the 2021 tax return during the 2022 tax filing season.

Up to $2,000 per child would be shielded from repayment if the error is due to net changes in the number of qualifying children, according to the Congressional Research Service. However, credit amounts above $2,000 would still have to be repaid.

To qualify for full repayment protection, filers must have had their main home in the United States for more than half of 2021 and a modified AGI for 2021 at or below the following amounts based on their 2021 filing status:

  • $60,000, married and filing a joint return or if filing as a qualifying widow or widower;
  • $50,000, filing as head of household; and
  • $40,000, a single filer or are married and filing a separate return.

When the modified AGI is at or above the amounts listed above, repayment protection will be phased out. Furthermore, there will be no repayment protection when the modified AGI on 2021 tax return reaches the following limits based on a filer’s 2021 filing status:

  • $120,000, married and filing a joint return or if filing as a qualifying widow or widower;
  • $100,000, filing as head of household; and
  • $80,000, a single filer or are married and filing a separate return.

If taxpayers are concerned or unsure whether they have to payback any payments they can visit this website to check their eligibility: https://www.irs.gov/credits-deductions/advance-child-tax-credit-eligibility-assistant.

Child Tax Credit Update Portal

The IRS has created the Child Tax Credit Update Portal to check whether the taxpayer is enrolled in the advanced monthly payments, to unenroll (stop payments), as well as provide or update bank account information for monthly payments.

Taxpayers who would rather claim the full credit (lump sum) when they file for 2021 tax return, or if the taxpayer knows they would not be eligible for the tax credit, can use the Portal to unenroll in the advance monthly payments.

Once the taxpayer unenrolls, they cannot re-enroll at this time, but the IRS expects that functionality to be ready in late September 2021.

The IRS offers a CTC Help Line to unenroll from payments: 800-908-4184. The Help Line is available Mondays through Fridays (except holidays) from 7 a.m. to 10 p.m. Eastern.

QUALIFYING FOR THE CTC UNDER THE AMERICAN RESCUE PLAN

Note

If at any time the taxpayer no longer meets the qualifying factors listed below, it should be reported as soon as possible using the Child Tax Credit Update Portal to report any changes.

Qualifying Child

A qualifying child must be under the age of age 18 at the end of the calendar year 2021 and must have a valid Social Security number.

Any child(ren) born in 2021, will count toward the child tax credit payment of $3,600. More on a qualified child here.

Residency

The taxpayer must have a main home in the United States (including the 50 states and the District of Columbia) for more than half the year or file a joint return with a spouse who has a main home in the United States (including the 50 states and the District of Columbia) for more than half the year.

Note

Low- income families residing in Puerto Rico and the U.S. Territories are eligible to receive the child tax credit. However, residents of Puerto are not eligible to receive advance payments for the 2021, click here for more information.

Immigration Criteria

The taxpayer and spouse, if married filing a joint return, must have either a Social Security number or an Individual Taxpayer Identification Number (ITIN).

Tax credit payments will be made for each qualifying child with a valid Social Security number.

Income

Households do not need to have income to claim the credit. However, to receive the full credit, the household’s AGI must be below:

  • $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
  • $112,500 if filing as head of household; or
  • $75,000 if you are a single filer or are married and filing a separate return.

The amount of the credit may be reduced if the households’ AGI is higher than the limits listed above. In addition, there is a phaseout when AGI exceeds:

  • $400,000 if married and filing a joint return; or
  • $200,000 for all other filing statuses.

FILING FOR THE CTC UNDER THE AMERICAN RESCUE PLAN

Automatic

Certain households do not need to sign up or take any action, they are households who have:

  • Filed a 2019 or 2020 tax return, or
  • Signed up with the Non-Filer tool last year to receive a stimulus check from the IRS.

If the taxpayer needs to make changes (income, residency, etc.) or update their personal bank information, they can go to the Child Tax Credit Update Portal.

Not Automatic

Households who were not required to file a 2020 tax return, but who want to apply for the Child Tax Credit, should use the Child Tax Credit Non-filer Sign-up Tool.

Child & Dependent Care Tax Credit (CDCC) Under the American Rescue Plan

DESCRIPTION OF CDCC UNDER THE AMERICAN RESCUE PLAN

The CDCC, typically a non-refundable tax credit, is a credit that is based on a percentage of the taxpayer’s work-related expenses to care for a qualifying person to enable the taxpayer to work or seek employment. Under the American Rescue Plan (ARP), the CDCC is fully refundable for the 2021 tax return (filed in 2022).

In addition, the ARP increased the amount of expenses eligible for the credit and it relaxed the credit reduction due to income levels.

The Benefit (Credit) Amount

Under the ARP, for tax year 2021 (filed in 2022) the maximum amount of the CDCC is 50% of the taxpayer’s work-related expenses (an increase from 35%). The percentage will vary depending on the taxpayer’s adjusted gross income, or AGI, (including a spouse’s income if a filing a joint return).

Qualifying expenses are capped at:

  • $8,000 (increased from $3,000) for one qualifying person;
  • $16,000 (increased from $6,000) for two or more qualifying individuals.

Benefit Phase Out

The credit phases out as the AGI increases past $125,000:

  • $125,001 and $183,000 the credit percentage is phased out from 50% to 20%
  • $183,001 to $400,000 the credit percentage remains at 20%
  • $400,001 to $438,000 the credit percentage is phased out from 20% to 0%

The credit completely phases out if AGI is more than $438,000.

Accessing the Payment

The new changes to the CDCC under the American Rescue Plan is available to taxpayers when filing for the 2021 tax return.

QUALIFYING FOR CDCC UNDER THE AMERICAN RESCUE PLAN

For additional details on qualifying factors, go to https://www.irs.gov/newsroom/child-and-dependent-care-tax-credit-faqs.

Qualifying Person

A qualifying person includes:

The individual must live in the home for over half the year and must not provide over half of their own support. A qualifying person includes:

  • Children under the age of 13, this can be the taxpayers own child, stepchild, foster child, brother or sister, step-sibling, or a descendant of any of these individuals;
  • A spouse who is mentally or physically unable to care for themselves and lives with the taxpayer for more than half the year;
  • A dependent (of any age) who is physically or mentally unable to care for him or herself and for whom the taxpayer can claim an exemption.

Qualifying Expenses

The qualifying expenses must have been used for a qualifying person (above) to be able to work or look for work. Qualifying expenses can include payments to a daycare center, nanny, or nursery school. Costs of sending kids to day camp in the summer counts however, overnight camp does not qualify. In addition, costs for private K-12 school do not qualify, because those are considered education expenses rather than care expenses.

Costs for before-school and after-school programs qualify, as well as costs of domestic, as long as at least part of the cost goes towards care of a qualifying individual. More on qualifying expenses here.

Qualifying expenses are capped at:

  • $8,000, for one qualifying person;
  • $16,000, for two or more qualifying individuals.

Qualifying Provider

Taxpayers claiming the credit must include the name, address, and social security number or taxpayer identification number (TIN) of the provider on the return. If the care provider is a tax-exempt organization, report the name and address of the organization on the return.

Residency

The taxpayer must have a main home in the United States (including the 50 states and the District of Columbia) for more than half the year or file a joint return with a spouse who has a main home in the United States (including the 50 states and the District of Columbia) for more than half the year.

Immigration Criteria

Taxpayers must be U.S. citizens or lawfully residing immigrants who can lawfully work in the U.S. Qualifying persons must have a valid social security number or taxpayer identification number (TIN).

Income

There must be earned income (wages) to be eligible for the credit. Both spouses, if married filing jointly, must have earned income to qualify, there may be an exception, go to https://www.irs.gov/newsroom/child-and-dependent-care-tax-credit-faqs#q3.

If the taxpayer’s AGI is $125,000 or more, the credit will be reduced. Taxpayers whose AGI is above $438,000 will be ineligible for a credit.

FILING FOR CDCC UNDER THE AMERICAN RESCUE PLAN

To claim the credit for 2021, complete Form 2441, Child and Dependent Care Expenses and include the form when filing 2021 tax returns

Tax Preparation Assistance

TAXPAYER ASSISTANCE CENTERS

Taxpayer Assistance Centers have reopened with limited capacity, https://www.irs.gov/help/contact-my-local-office-in-new-york. Individuals must make an appointment. Upon arrival, a mask must be worn and 6 of distanced must be observed.

NYC DEPARTMENT OF CONSUMER AFFAIRS

The NYC Department of Consumer Affairs, in-person NYC Free Tax Prep services, are open with limited capacity. For more information go to https://www1.nyc.gov/site/dca/consumers/file-your-taxes.page.