On March 11, 2021, Biden signed into law the American Rescue Plan Act of 2021. The bill is summarized as a COVID-19 relief package and contains several direct payments, grants, incentive pay, welfare, and subsidies. Because of that summary, many do not realize that hidden among the government spending are a few tax law changes.
Once such change is a new child tax credit rule for tax year 2021 only.
Under normal rules, taxpayers receive a child tax credit for $1,000 per qualifying child who has not attained age 17. This tax credit is phased out by 5% per $1 your modified adjusted gross income (MAGI) is over the threshold amount. The normal thresholds are $110,000 joint and $75,000 single.
The Tax Cuts and Jobs Act added “special rules for taxable years 2018 through 2025” such that the credit is $2,000 per qualifying child and the thresholds are $400,000 joint and $200,000 single. These rules are in subsection (h).
Now, Section 9611 of the American Rescue Plan Act amends Section 24 of the Internal Revenue Code of 1986 again adding a “special rules for 2021.” These rules only apply to tax year 2021 (stated as “any taxable year beginning after December 31, 2020, and before January 1, 2022”).
This act states that “Subsection (h)(2) shall not apply” in 2021, which means effectively that the 2021 Tax Cuts and Jobs Act rules are not used in 2021.
It goes on to make the 2021 tax credit worth $3,000 for children who have “not attained age 18” (rather than the usual 17) or $3,600 for children who have “not attained age 6.”
Furthermore, the 2021 thresholds are set to $150,000 joint and $75,000 single.
Then, the reduction of your credit from these 2021 thresholds is limited to the “applicable credit increase amount,” which is defined as “the amount of the credit allowable under this section for the taxable year determined without regard to this paragraph and subsection (b).”
Subsection (b) is the normal rules and, since we were already told that “Subsection (h)(2) shall not apply,” this means that $1,000 is most people’s “applicable credit increase amount.”
In other words, taxpayers in 2021 will generally be permitted to receive a tax credit of between $1,000 to $3,000 per qualifying older child and between $1,000 and $3,600 per qualifying younger child.
For example, a joint filing family with one child under age 6 would receive $3,600 as a child tax credit if their AGI is at or below $150,000 and only $1,000 if their AGI is above $202,000 ($2,600 / 5% + $150,000).
In this one-child example, the credit phase-out can conceptually be thought of as an additional 5% tax on the $52,000 earned after the $150,000 AGI threshold.
If your AGI is close to $150,000 and you have several children, you may want to consider this tax credit when deciding whether to fund your traditional or Roth retirement accounts this year and when developing your systematic Roth conversion plan.
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