How Did the American Rescue Plan Child Tax Credit Work?

The American Rescue Plan Act, enacted in March 2021, temporarily altered the Child Tax Credit for the 2021 tax year. This one-year expansion was a response to the economic circumstances many families faced. The changes were designed to deliver immediate relief and support to a broader range of households across the country.

Key Changes Under the American Rescue Plan

The American Rescue Plan Act of 2021 introduced four modifications to the Child Tax Credit for a single tax year. The first change was an increase in the credit’s value. For the 2021 tax year, the credit rose from $2,000 per child to $3,600 for each qualifying child under age six and $3,000 for each child between six and seventeen.

Another expansion of eligibility involved the age of the qualifying child. Previously, the credit was only available for children under 17. The 2021 rules temporarily included 17-year-olds, allowing families to claim the $3,000 credit for them.

The credit also became fully refundable for 2021. This meant that a family could receive the entire amount of the credit they qualified for as a cash refund, even if they had no federal income tax liability. This was a departure from the prior structure where only a portion of the credit was refundable.

Finally, the law established a system of advance monthly payments. The Internal Revenue Service (IRS) was directed to pay out half of a family’s estimated 2021 Child Tax Credit in monthly installments from July through December 2021. The remaining half of the credit would then be claimed on the 2021 tax return.

Eligibility Requirements for the 2021 Credit

To qualify for the enhanced 2021 Child Tax Credit, taxpayers and their children had to meet criteria based on income, the child’s status, and residency. The full increased credit amount was available to taxpayers with a modified adjusted gross income (AGI) up to $75,000 for single filers, $112,500 for heads of household, and $150,000 for married couples filing a joint return.

For those with incomes above these levels, the expanded portion of the credit—the amount above the standard $2,000—was gradually reduced. A separate, higher income phase-out applied to the base $2,000 credit amount, beginning at a modified AGI of $200,000 for single filers and $400,000 for those married filing jointly.

The definition of a qualifying child for the 2021 tax year followed several tests. The child had to meet the relationship test (being a son, daughter, stepchild, foster child, or sibling), the support test (not providing more than half of their own financial support), and the residency test. The residency test required the qualifying child to have lived with the taxpayer for more than half of the 2021 tax year in the United States.

Understanding the Advance Monthly Payments

The advance payment system was a feature of the 2021 Child Tax Credit that delivered funds to families throughout the latter half of the year. The IRS determined eligibility and calculated these monthly payments automatically, using information from taxpayers’ 2020 or 2019 tax returns. Each monthly payment represented one-twelfth of half the total estimated credit.

To manage this system, the IRS created the Child Tax Credit Update Portal. Through the portal, individuals could choose to unenroll from receiving the advance payments if they preferred to receive the entire credit when filing their taxes. Taxpayers could also use the portal to update their bank account information or to report changes in circumstances, such as income or the number of dependents.

These payments were an advance on the tax credit that would be claimed on the 2021 tax return. The total amount received had to be accounted for during tax filing season through a reconciliation process.

Reconciling the Credit on Your 2021 Tax Return

Information and Documents Needed

To accurately reconcile their advance Child Tax Credit payments, taxpayers needed to gather specific documents. The primary document was IRS Letter 6419, 2021 Advance CTC. The IRS mailed this letter to all taxpayers who received advance payments, and it detailed the total amount disbursed to them during 2021 and the number of qualifying children used for the calculation. If a couple was married and filed jointly, each spouse would have received their own letter.

If Letter 6419 was lost or not received, taxpayers could find their total advance payment amount by accessing their IRS Online Account. The reconciliation itself was performed on Schedule 8812, Credits for Qualifying Children and Other Dependents. This form was the official document for calculating the total Child Tax Credit for which a taxpayer was eligible in 2021, reporting the advance payments received, and determining the final amount of the credit.

The Reconciliation Process

The reconciliation process on Schedule 8812 required calculation. The first step was to enter the aggregate amount of advance payments received from July to December 2021, taken from Letter 6419 or the IRS Online Account. This represented the portion of the 2021 credit the taxpayer had already been paid.

Next, the taxpayer used their completed 2021 tax return information, including their final modified AGI and number of qualifying children, to calculate the total Child Tax Credit they were actually eligible to claim. This step was necessary because a taxpayer’s circumstances could have changed between when the IRS estimated the advance payments and the end of the year.

The final step involved comparing the total credit amount the taxpayer was eligible for with the total advance payments they received. If the calculated credit was more than the advance payments, the taxpayer would claim the remaining amount on their Form 1040. Conversely, if the advance payments received exceeded the amount of credit they were ultimately eligible for, they may have been required to repay the excess amount, unless they qualified for repayment protection based on their income level.

The Child Tax Credit After 2021

The enhancements to the Child Tax Credit under the American Rescue Plan were temporary and applied only to the 2021 tax year. Beginning with the 2022 tax year, the credit’s rules reverted to their pre-ARP status, meaning the changes that provided expanded support were no longer in effect.

For tax year 2022 and subsequent years, the maximum credit amount returned to $2,000 per qualifying child. The age limit for a qualifying child also reverted, with the credit once again only available for children under the age of 17 at the end of the tax year. Furthermore, the credit was no longer fully refundable, and the system of advance monthly payments was discontinued. The credit could only be claimed as a lump sum when filing an annual tax return.