Expanded Child Tax Credit

The child tax credit was expanded by the American Rescue Plan Act of 2021. The previous credit of $2,000 per child ($1,400 of which was refundable) was expanded to $3,000 per child ($3,600 for children under 6). The expanded credit was deemed fully refundable for 2021; a tax credit is "refundable" if any excess of the tax credit over a taxpayer's total tax liability is paid to the taxpayer as a refund.1 In addition, half of the credit will be prepaid; advance monthly payments will be distributed over the six-month period from July 2021 through December 2021 with a maximum of $250-$300 per child. The other half will be credited after filing a 2021 tax return.

Income eligibility phaseouts for the expanded portion of the credit begin at over $75,000 for individuals ($150,000 married). Phaseouts for the original $2,000 credit per child remain at $200,000 for individuals ($400,000 married).

The expanded credit is for tax year 2021; the credit reverts to previous amounts in 2022.

Treatment in the National Income and Product Accounts (NIPAs)

Refundable income tax credits are classified as government social benefits to persons whether those credits are prepaid, reduce tax liabilities or are paid as tax refunds. Government social benefits to persons are included in personal income.

Prepaid refundable tax credits are recorded as government social benefits in the months in which they are paid. For the expanded child tax credit for 2021, prepayments will be recorded in July 2021 through December 2021 based on data from the Department of Treasury's Monthly Treasury Statement.

The remaining portion of the expanded credit that will be claimed as part of tax filing in 2022 (for the 2021 tax year) will be recorded as government social benefits to persons in 2022. This portion of the credit will be allocated evenly across the 12 months of calendar year 2022.

1 Tax credits are "nonrefundable" if taxpayers can only claim the credit up to the amount of their tax liability. In contrast to refundable and nonrefundable tax credits, tax allowances, exemptions, and deductions are subtracted in the calculation of taxable income, reducing the amount of the original liability.