March 17, 2021

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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US Expats and the 2021 Expanded Child Tax Credit

Last week, the American Rescue Plan Act of 2021 (ARPA) was signed into law. ARPA is a massive $1.9 trillion stimulus bill – the third of its kind since the start of the COVID pandemic. The bill has several provisions that are potentially relevant for U.S. citizens living abroad, including a third round of economic stimulus payments.

This blog focuses on another provision in ARPA – namely, the expanded 2021 child tax credit, which for reasons explained below, may have limited benefit for many U.S. expats.

Pre-Expanded Child Tax Credit Rules (2018-2020)

Under pre-ARPA law (relevant for tax years 2018-2020), the credit is $2,000 per "qualifying child,” defined as a child 16 years of age or younger whom you could claim as a dependent, and who is a U.S. citizen or national, or a U.S. resident.

The maximum refundable credit is $1,400 per qualifying child.

The $2,000 credit amount phases out if your modified adjusted gross income (AGI) is over $200,000 ($400,000 for joint returns).

A $500 additional credit is also allowed for each qualified dependent who isn't a qualifying child, although this amount is not refundable.

The Expanded Child Tax Credit (2021)

Under ARPA, the child tax credit amount is increased for the 2021 tax year to $3,000 per child ($3,600 for children under age 6).

The increased amount phases out for taxpayers with modified AGI of over $75,000 for single filers, $112,500 for heads-of-households, and $150,000 for joint filers.

Also under ARPA, the definition of a qualifying child is expanded to include children up to the age of 17.

Claiming a Refund for the Expanded Child Tax Credit

Importantly for U.S. expats, the 2021 expanded child tax credit, including the increased amount, is fully refundable, but only for a taxpayer (either spouse for a joint return) with a principal place of abode in the U.S. for more than one-half of the tax year, or for a taxpayer who is a bona fide resident of Puerto Rico for the tax year.

This clause, unfortunately, likely makes most U.S. expats ineligible for a refund of the increased child tax credit amount. The increased amount can be used, however, to reduce any taxes that you may owe.

Meaning, if you are entitled to the full expanded credit but live outside the U.S. for half the year or more, you’ll be entitled to a $3,000 (or $3,600) credit for your qualifying child, but only a $1,400 portion of the credit will be refundable.

Advance payments of the Expanded Child Tax Credit

Another interesting aspect of the 2021 expanded child tax credit is the plan to make monthly (periodic) advance payments of the credit during 2021, which are expected to total 50% of the IRS's estimate of the eligible taxpayer’s 2021 child tax credits. It’s expected that the payments will be made in July through December of 2021.

To determine your advance payments, the IRS will look at your 2020 income tax return (or 2019 return, if your 2020 return has not yet been filed).

Further guidance is expected to better explain how the advanced payment amounts will be determined.

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