Updated Child Tax Credit: The Story So Far

1998 was a good year.

I was five years old and just got a Nintendo 64. My friend just got the very first Mario Party, and I loved it so much that I saved up about $50 and bought my own copy of Mario Party. It's a story that sticks with me to this day.

I'm not going to comment on "kids these days" because, in many ways, I don't envy them, and I don't think broad generalizations are particularly helpful for any purpose. However, I will say that if I wanted Mario Party these days (or 25 Fortnite skins or whatever is popular for $50 these days, I don't really know anymore), I wouldn't be cleaning my room, doing dishes, and picking up sticks for quarters at a time.

Instead, I'd lay it out on the table: "Mom, Dad, you're gettin' that stimulus because of me. Time to pay what you owe." Boss Baby was, in this sense, slightly prophetic. The smart toddlers, the tax-savvy toddlers, the toddlers aware of the nuances of the developments of the Internal Revenue Code of 1986 and American Rescue Plan Act - these are the toddlers that are going to get their fair share of this "stimmy round 4". But for the parents, what exactly is going on with these stimuluses?

These updated child tax credits are a product of the American Rescue Plan Act (ARPA), which was made effective in the middle of March 2021 (about 3 months ago). I remember it very well, since this same act made a large swathe of unemployment nontaxable for many taxpayers. This was quite a generous act, albeit a bit abrupt for us tax professionals - the middle of tax season isn't generally a great time to change the tax law, but regarding taxes (whether paying or preparing), you play the cards you're dealt.

Sec. 9611(a)(i)(3) of the ARPA details it pretty nicely: in the words of the bill, it is "substituting ‘$3,000 ($3,600 in the case of a qualifying child who has not attained age 6 as of the close of the calendar year in which the taxable year of the taxpayer begins)’ for ‘$1,000’." ($1,000 was the Child Tax Credit as described by the Internal Revenue Code of 1986, NOT the Tax Cuts and Jobs Act.)

The Child Tax Credit was expanded to $2,000 under the TCJA, expanded again to $3,000 under the ARPA, and expanded AGAIN under to $3,600 under the ARPA if the kids in question are under 6. In addition, the full amount of the credit is now FULLY REFUNDABLE - this means that the credit is not limited by the taxpayer's tax liability and can add "dollars to a refund" when tax liability is zero. Previously, $1,400 of the $2,000 child tax credit was refundable. If a taxpayer wanted to explain this to their tax-savvy toddler: nonrefundable credits are good, but refundable credits are awesome.

Very generous. But what's the catch?

There is a phase-out range that is contingent on adjusted gross income (AGI); the ARPA bill itself says the phase-out range depends on what's called Modified AGI (MAGI), but for most taxpayers, these two figures will be one and the same. The phase-out ranges depend on filing status and BEGIN as follows:

• Single/Married Filing Separate: $75,000
• Head of Household: $112,500
• Married Filing Joint: $150,000

The phase-out range reduces the credit by $50 for every $1,000 that it exceeds the AGI threshold; for instance, if a Head of Household taxpayer has one 5 year old and has AGI of $113,500, the credit will be capped at $3,550. The language of the ARPA bill indicates that this phase-out only applies to the EXCESS credit allowed by the ARPA (i.e. the extra $1,000/$1,600 increase allowed by ARPA). Taxpayers who phase out of the excess should still have access to the TCJA-era Child Tax Credit of $2,000 (that has much higher phase-out ranges than the ARPA expansion: $200,000 for non-joint, $400,000 for joint taxpayers).

Fair enough - taxpayers with income a bit too high for the ARPA Child Tax Credit can still get the TCJA Child Tax Credit. But what's this about an "advance payment"?

It's no surprise to anyone in mid-2021 that COVID-19 shook the world - socially, geopolitically, and economically. Whether one agrees or disagrees with their implementation of these stimuluses (stimuli?), the three previous stimulus payments were intended to offer the average taxpayer a semblance of economic stability due to this shake. The expansion of the Child Tax Credit and advance payment of the credit is no different in this regard; qualifying taxpayers will receive one-half of the credit paid out over 6 monthly (beginning July 15). If a taxpayer under the filing requirement has a child under 6, these will equal 6 monthly payments of $300 (assuming they're getting the full credit). If the child is over 6, they'll receive monthly payments of $250 (full credit).

In the event one would want to opt out of this credit, the IRS has provided a means to do that. Although I have not tried this myself, I have heard that it is a bit tricky and annoying to do, but if there are concerns about the taxability of this (or you just plain don't want it or just want the full credit at tax time), here is a link to access the means to opt out:

https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021

This link also contains a way for non-filers to "opt in", since these credits look at 2019. Note: as of June 30, 2021, it is too late to opt out of the July payment (the deadline for that was June 28, 2021), but a taxpayer can opt out of the payments from August onward. It looks like the payments will begin processing on the 15th of each month.

Will this advance payment get taxed? Unfortunately, as of today, June 30, 2021, our impeccable leadership not yet considered that (at least, publicly). My hunch is that it will get treated similarly to the Economic Impact Payments of last year - if you have not received them and should have, you'll probably have to "true it up" when you file your 2021 return (via a Recovery Rebate). If a taxpayer has received them and and should not have, they probably won't have to pay it back (assuming treatment of this credit is similar to the Recovery Rebate Credit of 2020). Note that this paragraph is a hypothesis based on past events and is in no way a statement of fact, at the time of writing.

The last thing I know about this credit, as of today: if you had a baby in 2021, you'll have to true it up at 2021 tax time.

Keep in mind that, given the rate of change this last tax season, I would not be surprised if many parts of this article are redundant by the end of the year. Regardless, this stuff is good to be aware of, as it is an indication of the "tax tone" of the US government for the next few years.

Boss Babies, you heard the spiel. Demand a big Christmas this year (unless you usually ask for building materials, then demand an average Christmas).

DISCLAIMER:

This article is made available by the CPA Matthew McLaughlin for educational purposes only, as well as give you, the reader, a general understanding of the tax law, not to provide specific tax advice. By reading this article and relying on its information, you understand that there is no CPA-client relationship between you and me (or the firm with whom I am employed). This article should not be used as a substitute for competent accounting advice from a licensed certified public accountant in your state.