As taxpayers plan their 2021 taxes, there is good news in the form of an enhanced child-tax credit.
The legislation known as the Tax Cuts and Jobs Act (TCJA) doubled the credit amount, increased the refundable portion, and expanded its scope to include dependents other than qualified children. Additionally, the TCJA enlarged the pool of taxpayers eligible for the credit by increasing the adjusted-gross-income (AGI) ranges.
Under the TCJA, a taxpayer's potential credit amount begins to phase out at $400,000 of Modified AGI (MAGI) for joint filers and $200,000 for all others. Formerly, the credit began to phase out at $110,000 for joint filers, $55,000 for married separately, and $75,000 for all others.
The new law doubles the credit from $1,000 to $2,000 per "qualifying child." Also, the qualifying child must meet the relationship, abode, and support tests while also being under age 17.
The relationship test requires the individual to be the taxpayer's (1) child or a descendant of the child, or (2) sibling or step-sibling or a descendant of the sibling or step-sibling.
The abode test requires that the individual have the same principal place of abode as the taxpayer for more than half the year.
The support test requires that the individual does not provide more than half of his or her support for the calendar tax year.
The big picture is that taxpayers with MAGIs below the threshold will be able to claim a $2,000 credit for each qualifying child. Of the $2,000 credit per qualifying child, up to $1,400 can be refundable. The refundable portion of the credit applies only when the taxpayer is unable to fully use the $2,000 nonrefundable credit to offset his or her tax liability.
In addition, the new law will provide a $500 credit for each dependent living with the taxpayer who does not meet the definition of a qualifying child, such as parents, uncles and aunts, nieces and nephews.
In the past, taxpayers in the middle- to high-income brackets may have largely ignored the child tax credit. However, the TCJA expanded the credit, both in terms of eligible taxpayers and eligible dependents.
Please note: For 2021 only, there is an advanced child credit currently available until December 2021.
Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or email@example.com.
We depend on the support of readers like you to help keep our publication strong and independent. Join us.