Section 9611 of the Act adds Code Sec. 24(i), which significantly expands the child tax credit available to qualifying individuals by:
•increasing the credit from $2,000 to $3,000 or, for children under 6, to $3,600;
•increasing from 16 years old to 17 years old the age of a child for which the credit is available; and
•increasing the refundable amount of the credit so that it equals the entire credit amount, rather than having the taxpayer calculate the refundable amount based on an earned income formula.
Eligibility for Child Tax Credit: The refundable credit applies to a taxpayer (in the case of a joint return, either spouse) that has a principal place of abode in the United States for more than one-half of the tax year or is a bona fide resident of Puerto Rico for such tax year.
Phaseout of Child Tax Credit: As under current law, the 2021 child tax credit is phased out if a taxpayer’s (Realtors, Brokers, and Real Estate Professionals) modified adjusted gross income exceeds certain thresholds. For 2020, the credit is phased out for a taxpayer with modified adjusted gross income in excess of $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. The $2,000 child tax credit otherwise allowable for 2020 must be reduced by $50 for each $1,000, or fraction thereof, by which the taxpayer’s modified adjusted gross income exceeds such threshold amounts. For 2021, however, special phase-out rules apply to the excess credit available for 2021 (i.e., either the $1,000 excess credit or, for children under 6, the $1,600 excess credit). Under these modified phase-out rules, the modified adjusted gross income threshold is reduced to $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in any other case. This special phase-out reduction is limited to the lesser of the applicable credit increase amount (i.e., either $1,000 or $1,600) or 5 percent of the applicable phase-out threshold range.
Monthly Payments of Child Tax Credit: Section 9611 of the Act adds Code Sec. 7527A which provides a special program under which individuals with refundable child tax credits can receive advance payments equal to one-twelfth of the annual advance amount, thus potentially receiving up to $300 per month for children under 6 and $250 per month for children 6 years and older. However, these payments would only be made from July 2021 through December 2021. In essence, the taxpayer would receive one-half of the total child tax credit in the last six months of 2021 and the other half of the credit after filing his or her tax return.
The “annual advance amount” is the amount (if any) which is estimated as being equal to the amount which would be treated as allowed as a child tax credit if (i) the taxpayer meets the requirement of living in the United States for more than one-half of the tax year or being a bona fide resident of Puerto Rico for such tax year; (ii) the taxpayer has modified adjusted gross income for such tax year that is equal to the taxpayer’s modified adjusted gross income for 2019 or, if no return was filed for 2019, then modified adjusted gross income for 2018 (i.e., the reference tax year); (iii) the only children of the taxpayer for such tax year are qualifying children properly claimed on the taxpayer’s return of tax for the reference tax year, and (iv) the ages of such children (and the status of such children as qualifying children) are determined for such tax year by taking into account the passage of time since the reference tax year. If the annual advance amount is modified, the Secretary of Treasury may adjust the amount of any monthly payment made after the date of such modification to properly take into account the amount by which any monthly payment made before such date was greater than or less than the amount that such payment would have been on the basis of the annual advance amount as so modified.
Excess Advance Payments: If the aggregate amount of advance payments exceeds the amount of the credit allowed for 2021, the excess increases the taxpayer’s tax liability for 2021. However, a safe harbor based on the taxpayer’s modified adjusted gross income may apply to reduce this amount. Under this safe harbor, in the case of a taxpayer whose modified adjusted gross income for the tax year does not exceed 200 percent of the applicable income threshold, the amount of the increase in tax due to the excess advance payments is reduced (but not below zero) by the safe harbor amount. The applicable income threshold is $60,000 in the case of a joint return or surviving spouse, $50,000 in the case of a head of household, and $40,000 in any other case. The safe harbor amount is the product of $2,000 multiplied by the excess (if any) of the number of qualified children taken into account in determining the annual advance amount with respect to months beginning in such tax year, over the number of qualified children taken into account in determining the credit allowed for the tax year.
If information contained in the taxpayer’s tax return for the reference tax year does not establish the status of the taxpayer as being eligible for the child tax credit, the Secretary of Treasury may infer such status (or the lack thereof) from other information sources. A child will not be taken into account in determining the annual advance amount if the death of such child is known to the Secretary of Treasury as of the beginning of 2021.
On-Line Portal: The Secretary of Treasury must establish an online portal which (i) allows taxpayers to elect not to receive the payments on a monthly basis, and (ii) allows taxpayers to provide information relevant to determining the amount of an advance payment, such as a change in the number of qualifying children or a change in the taxpayer’s marital status.
Notice of Payments: Generally, by January 31, 2022, the Secretary of Treasury must provide to any taxpayer to whom child tax credits were made during 2021 written notice which includes the taxpayer’s taxpayer identity, the aggregate amount of such payments made, and such other information as may be appropriate.
Exception from Offset: The advance child tax credit payments are generally excepted from reduction or offset, including where the taxpayer owes federal taxes that would otherwise be subject to levy or collection.
Application of Child Tax Credit in Possessions: Section 9612 of the Act instructs the Treasury Department to make payments to each “mirror code” territory for the cost of such territory’s child tax credit. This amount is determined by Treasury based on information provided by the territorial governments. Puerto Rico, which does not have a mirror code, will receive the refundable credit by having its residents file for the child tax credit directly with the IRS, as they do currently for those residents of Puerto Rico with three or more children. For American Samoa, which does not have a mirror code, the Treasury Department is instructed to make payments in an amount estimated as being equal to the aggregate amount of benefits that would have been provided if American Samoa had a mirror code in place.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
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Palm Desert, CA 92260
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(Updated 03/18/2021 08:05)