The Child Tax Credit: Temporary Expansion for 2021 Under the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2)

The Child Tax Credit: Temporary Expansion for 2021 Under the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2)

INSIGHTi
The Child Tax Credit: Temporary Expansion
for 2021 Under the American Rescue Plan Act
of 2021 (ARPA; P.L. 117-2)
Updated May 12, 2021
In recent years, there has been increased interest in providing direct benefits to families with children to
reduce child poverty in the United States, sometimes in the form of tax benefits. The National Academy
of Sciences (NAS) included a “child al owance” as part of a package of policies to reduce child poverty
over 10 years. (Senator Romney has also proposed a child al owance.) Some research has suggested that
increasing the amount of the child tax credit that low-income families receive would substantial y reduce
child poverty, boost future earnings, and potential y improve future health and education outcomes.
In the 116th Congress, there were several legislative proposals to expand the child tax credit, especial y for
lower-income families that tend to receive little or no benefit from the current credit. In the 117th
Congress, a temporary one-year expansion of the child credit (for 2021) was included in the American
Rescue Plan Act of 2021 (ARPA; P.L. 117-2). The Biden Administration has proposed making the full
refundability provision included in the ARPA expansion of the child credit permanent, while extending
other ARPA provisions through the end of 2025.
This Insight provides a summary of the child tax credit prior to ARPA and an overview of the temporary
child credit expansion under ARPA for 2021.
How would the child credit have been calculated in 2021 before ARPA?
For 2021, prior to ARPA, the child tax credit would al ow eligible taxpayers to reduce their federal
income tax liability by up to $2,000 per qualifying child. A qualifying child was general y any dependent
child under 17 years old. The credit was reduced in value, or phased out, by $50 for every $1,000 of
income over $200,000 ($400,000 for married couples who file joint tax returns).
If a taxpayer’s income tax liability was less than the maximum value of the child tax credit, the taxpayer
may have been eligible to receive al or part of the difference as a refundable credit. The refundable
portion of the child tax credit—the amount which was greater than income taxes owed—is referred to as
the additional child tax credit (ACTC) and was calculated using what is sometimes referred to as “the
earned income formula.” Under the earned income formula, the ACTC gradual y increased, or phased in,
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as earned income rose above $2,500. The maximum amount of the ACTC was $1,400 per qualifying
child. CRS estimates that about one in every five taxpayers (19%) with a credit-eligible child had low
incomes that resulted in them receiving less than the maximum credit.
After 2021, the ARPA expansion described in this Insight is scheduled to expire, and the credit would thus
revert to the “prior law” parameters described above until the end of 2025.
How does the child credit change in 2021 under the American Rescue
Plan Act?
The American Rescue Plan Act of 2021 (ARPA; P.L. 117-2) makes several temporary changes (for 2021
only) that expand the child tax credit, primarily for low-income taxpayers. These changes include
 Expanding eligibility to 17 year olds: The law increases the maximum age for an
eligible child from 16 to 17.
 Making the credit fully refundable: The law eliminates the ACTC phase-in based on
earned income and eliminates the ACTC cap of $1,400 per child. Hence, the child credit
is “fully refundable” and the full value is available to otherwise eligible taxpayers with no
earned income.
 Increasing the credit for low- and moderate-income taxpayers, with larger increases
for younger children: The law increases the maximum amount of the credit from $2,000
per child to $3,600 per child for a young child (0-5 years old) and $3,000 per child for an
older child (6-17 years old), as il ustrated in the figures below. General y, this increase in
the maximum child credit of $1,600 per young child and $1,000 per older child gradual y
phases out at a rate of 5% as income exceeds specified thresholds until the credit amount
equals the current-law maximum of $2,000 per child. These thresholds are $75,000 for
single filers, $112,500 for head of household filers, and $150,000 for married joint filers.
(The actual income level at which the credit phases down to $2,000 per child depends on
the number and age of qualifying children.) For many families, the credit then plateaus at
its prior-law level of $2,000 per child and phases out when income exceeds the current-
law threshold of $200,000 ($400,000 for married joint filers). For larger families, the
credit may never plateau at the $2,000 per child level, but simply continue to gradual y
phase out.
These changes will increase the amount of the credit for low- and moderate-income taxpayers, while
higher-income families will general y receive the same benefit as under prior law (unless they have an
eligible 17-year-old), as il ustrated in the figures below.
The Joint Committee on Taxation estimates this temporary one-year expansion of the child credit would
cost $110 bil ion, mostly in FY2021 and FY2022 (these estimates also include the relatively smal er cost
of permanently extending the credit to residents of U.S. territories).

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How does ARPA advance the credit?
ARPA directs the Treasury to issue half of the expected 2021 credit in periodic payments beginning after
July 1, 2021 (these periodic payments wil general y be equal in amount). Taxpayers wil claim the
remaining half of the total 2021 credit when filing their 2021 income tax return in early 2022. The
expected 2021 credit amount is the total amount the taxpayer would be expected to receive in 2021 (and
not just the amount of the credit that exceeds income taxes owed).
The amount of the payments advanced in 2021 are estimated based on 2020 income tax data or, if
unavailable, 2019 income tax data. Families can update this information on a portal in 2021.
The IRS can adjust income tax withholding to take into account the advanced child credit.
Will taxpayers need to repay the advanced credit?
When a taxpayer files their 2021 return (in 2022), they wil general y first calculate the total amount of
the 2021 child credit they are eligible for (based on the number of qualifying children, income, and
marital status for 2021). Then, the taxpayer wil subtract from their total 2021 credit the sum of advanced
child credit payments they received during calendar year 2021. For example, if an unmarried taxpayer had
two young children and less than $112,500 of income in 2020 and 2021, they would be eligible for a total
child credit for 2021 of $7,200. Since they would have received half of their total 2021 credit in advanced
payments in calendar year 2021 ($3,600), they would ultimately claim the remaining half ($3,600) on
their 2021 return. In this case, the taxpayer is not repaying the advanced credit—they are simply splitting
their total credit between the advanced payments they received in 2021 (50% of their total credit) and the
remaining 50% of the credit they claim on their 2021 tax return.
However, in cases where a taxpayer receives more in advanced payments than the total 2021 credit they
are eligible for, they wil general y need to repay any excess credit. A taxpayer may have excess credit
due to changes in income, marital status, or number of qualifying children between the year used to
estimate the advance (2020 or 2019) and their actual circumstances in 2021. For example, if a taxpayer’s
estimated advance payments totaled $5,400 (based on an estimate of three qualifying young children) but
the total 2021 credit they are actual y eligible for is $3,600 (because they only had one qualifying young
child), they would need to repay up to $1,800 (the difference between $5,400 and $3,600). Excess
payments caused by changes in the number of qualifying children general y wil not need to be repaid for
lower- and moderate-income taxpayers who are protected by a safe harbor (this safe harbor decreases as
income rises). Repayment may either reduce a taxpayer’s 2021 tax refund or result in the taxpayer being
required to remit payment to the IRS (or be subject to offset of a future tax refund).
Below are two il ustrative examples of how much in excess advanced child credit an unmarried taxpayer
would need to pay in certain circumstances.

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Author Information

Margot L. Crandall-Hollick

Acting Section Research Manager

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of

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