What is the 2021 Child Tax Credit

The 2021 Child Tax Credit (CTC) was significantly expanded and modified under the American Rescue Plan Act of 2021. Here are the key details:

1. Credit Amount:
   • The credit amount was increased to $3,000 per qualifying child aged 6 to 17 at the end of 2021.
   • For qualifying children under the age of 6 at the end of 2021, the credit amount was $3,600.
2. Refundability:
   • The 2021 CTC was fully refundable, meaning taxpayers could receive the full amount of the credit even if they had no earned income or did not owe any federal income tax.
   • To qualify for the full refundability, the taxpayer (or spouse, if filing jointly) must have had a principal place of abode in the United States for more than half of the taxable year.
3. Qualifying Child:
   • A "CTC qualifying child" is defined as a qualifying child under section 152(c) who had not attained the age of 18 by the end of 2021.
   • The child must have a valid Social Security Number (SSN) issued before the due date of the taxpayer's return.
4. Advance Payments:
   • The IRS was required to make periodic advance payments of the CTC, which were distributed from July 1, 2021, to December 31, 2021.
   • These advance payments were estimated to be 50% of the total CTC amount the taxpayer would be eligible for in 2021.
5. Phaseout:
   • The increased credit amount began to phase out for taxpayers with modified adjusted gross income (MAGI) above $150,000 for joint filers or surviving spouses, $112,500 for heads of household, and $75,000 for all other taxpayers.
   • The phaseout reduced the increased credit amount by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s MAGI exceeded the applicable threshold.
6. Reconciliation:
   • Taxpayers who received advance payments were required to reconcile the total amount received with the actual CTC amount on their 2021 tax return.
   • If the advance payments exceeded the allowable CTC, the excess amount had to be repaid, subject to a safe harbor provision for lower-income taxpayers.
7. Special Rules for Puerto Rico:
   • Bona fide residents of Puerto Rico with one or more qualifying children were eligible to claim the fully refundable CTC for 2021, even if they had no income and paid no U.S. Social Security taxes.

These changes were specific to the 2021 tax year and were part of the broader efforts to provide financial relief during the COVID-19 pandemic.

Sources:
§ 24. Child tax credit
Rev. Proc. 2022-12
Rev. Proc. 2021-24
Rev. Proc. 2022-22
Rev. Proc. 2021-23
IRM Part 21. Customer Account Services. Chapter 6. Individual Tax Returns. Section 3. Credits
Rev. Proc. 2023-34