SECTION 2. BACKGROUND

.01 Child Tax Credit for Taxable Year 2021 . (1) Overview . Section 9611(a), (b)(1), and (b)(2) of the American Rescue Plan Act of 2021 (American Rescue Plan), Public Law 117-2, 135 Stat. 4, 144-149 (March 11, 2021), added §§ 24(i), 24(j), and 7527A to the Code. Section 24(i) modifies the child tax credit rules set forth in § 24 for any taxable year beginning after December 31, 2020, and before January 1, 2022 (taxable year 2021).

(2) Credit allowed . Under § 24(a), a taxpayer may claim a child tax credit against the taxpayer’s Federal income tax (as imposed by chapter 1 of subtitle A of the Code) for the taxable year with respect to each CTC qualifying child (as defined

1 Unless otherwise specified, all “section” or “§” references are to sections of the Internal Revenue Code (Code).

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in section 2.01(5) of this revenue procedure) of the taxpayer.

(3) Credit fully refundable . The child tax credit for taxable year 2021 is fully refundable for a taxpayer if the taxpayer (or spouse, if filing a joint return) has a principal place of abode in the United States (determined as provided in § 32) for more than one-half of taxable year 2021. See § 24(i)(1). Full refundability means that taxpayers can benefit from the maximum amount of the credit even if they do not have earned income or do not owe any Federal income tax for taxable year 2021.

(4) Credit amounts . Taxpayers claiming the child tax credit for taxable year 2021 may receive up to $3,000 for each CTC qualifying child who is between the ages of 6 and 17 as of the end of taxable year 2021 and $3,600 for each CTC qualifying child who is under the age of 6 as of the end of taxable year 2021. See § 24(i) (2) and (3).

(5) CTC qualifying child . A “CTC qualifying child” is a qualifying child of the taxpayer (as defined in § 152(c)) who has not attained age of 18 at the close of taxable year 2021. See § 24(i)(2)(A). No child tax credit is allowed for a qualifying child unless the social security number (SSN) of the child, which must be valid for employment and be issued by the Social Security Administration before the due date of the taxpayer’s taxable year Federal income tax return (including extensions), is provided on the return. See § 24(h)(7). If the taxpayer’s child was a U.S. citizen when the child received the SSN, the SSN is valid for employment.

(6) Nonresident aliens . Only certain nonresident aliens who are U.S. nationals; residents of Canada, Mexico, or South Korea; or students and business apprentices from India who qualify for benefits under Article 21(2) of the income tax treaty with India may claim the child tax credit or credit for other dependents (described in section 2.03 of this revenue procedure).

(7) Reconciliation requirement regard- ing credit and advance payments .

(a) Overview of reconciliation require- ment . Taxpayers who received advance child tax credit payments (described in section 2.02(1) of this revenue procedure) during calendar year 2021 must reduce (but not below zero) the amount of the child tax credit claimed for taxable year

2021 by the total amount of those advance child tax credit payments. See § 24(j)(1). If the amount of a taxpayer’s advance child tax credit payments received in calendar year 2021 exceeds the taxpayer’s allowable child tax credit for taxable year 2021, the taxpayer’s Federal income tax imposed for taxable year 2021 will be increased by the excess. See § 24(j)(2)(A).

(b) Safe harbor based on modified AGI . The amount by which a taxpayer’s Federal income tax for taxable year 2021 is increased by operation of § 24(j)(2)(A) may be reduced or eliminated if the taxpayer qualifies for the statutory safe harbor set forth in § 24(j)(2)(B). Under § 24(j)(2) (B), a taxpayer’s increase in tax is reduced by the “safe harbor amount.” The safe harbor amount is equal to a maximum of $2,000 multiplied by the difference in the number of CTC qualifying children the Internal Revenue Service (IRS) included when estimating the taxpayer’s advance child tax credit payments disbursed in calendar year 2021 and the number of CTC qualifying children properly taken into account in determining the allowed child tax credit amount (excess qualifying child). See § 24(j)(2)(B)(iv). The safe harbor amount reduces to zero as a taxpayer’s modified AGI exceeds certain income thresholds. See § 24(j)(2)(B)(ii). Because the income thresholds of this revenue procedure are lower than those of the safe harbor, an individual within the scope of this revenue procedure will qualify for the full safe harbor and will not have to repay any increase in tax if the increase in tax is attributable to the individual’s excess qualifying children. The increase in tax will be attributable to the individual’s excess qualifying children if the individual’s main home was in the United States for more than half of taxable year 2021.

.02 Advance Child Tax Credit Pay- ments for Calendar Year 2021 .

(1) In general . Section 7527A(a) requires the Secretary of the Treasury or her delegate (Secretary) to establish a program for making periodic advance child tax credit payments to taxpayers the total of which, during any calendar year, equals the “annual advance amount” (as defined in § 7527A(b)(1)) determined with respect to that taxpayer for that calendar year. These advance child tax credit payments were required to be made between July 1,

2021, and December 31, 2021, and generally were disbursed in equal amounts. See §§ 7527A(a), (b)(3), and (f).

(2) Definition of annual advance amount . Section 7527A(b)(1) defines the term “annual advance amount” to mean, with respect to any taxpayer for any calendar year, the amount (if any) that the Secretary estimates as being equal to 50 percent of the refundable child tax credit amount that would be treated as allowed by reason of § 24(i)(1) for the taxpayer’s taxable year beginning in that calendar year if:

(a) The U.S. principal place of abode status is determined with respect to the “reference taxable year,” as defined in § 7527A(b)(2);

(b) The taxpayer’s modified AGI for that taxable year is equal to the taxpayer’s modified AGI for the reference taxable year;

(c) The only children of the taxpayer for that taxable year are qualifying children properly claimed on the taxpayer’s return of tax for the reference taxable year; and

(d) The ages of those children (and the status of those children as CTC qualifying children) are determined for that taxable year by taking into account the passage of time since the reference taxable year.

.03 Credit for Other Dependents . For a taxable year beginning after December 31, 2017, and before January 1, 2026, a $500 credit may be available for a dependent of the taxpayer (within the meaning of § 152) who is not a CTC qualifying child or who is a CTC qualifying child but does not have an SSN valid for employment. See § 24(h)(4). The credit for other dependents is not addressed by this revenue procedure because the credit cannot be claimed unless income tax is owed and therefore is not applicable to individuals within the scope of this revenue procedure.

.04 Earned Income Credit . (1) Overview . The earned income credit is a refundable credit that low- to moderate-income individuals and families may claim. Section 32(a) provides that, in the case of an eligible individual, there is allowed as a credit against the tax imposed by subtitle A of the Code for the taxable year an amount equal to the credit percentage of so much of the taxpayer’s earned

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income for the taxable year as does not exceed the earned income amount.

(2) Amount of credit . (a) Maximum amounts . For taxable year 2021, the four maximum amounts of the earned income credit are the following:

(i) $1,502, if the eligible individual does not have a “qualifying child,” as defined in § 32(c)(3) (EIC qualifying child), or if none of the eligible individual’s EIC qualifying children has a valid SSN;

(ii) $3,618, if the eligible individual has one EIC qualifying child who has a valid SSN;

(iii) $5,980, if the eligible individual has two EIC qualifying children who have valid SSNs; and

(iv) $6,728, if the eligible individual has three or more EIC qualifying children who have valid SSNs.

(b) Factors for determining credit amount . The amount of the earned income credit that can be claimed by an eligible individual depends on the following factors:

(i) The individual’s “earned income amount,” which is the amount of earned income at or above which the maximum amount of the earned income credit is allowed.

(ii) The individual’s “applicable percentage,” which depends on the number of the individual’s EIC qualifying children, if any.

(iii) The individual’s applicable phaseout amount. With regard to that amount, each individual has a “threshold phaseout amount” and a “completed phaseout amount,” both of which depend on the individual’s income and filing status. The “threshold phaseout amount” is the amount of AGI (or, if greater, earned income) above which the maximum amount of the credit begins to phase out. The “completed phaseout amount” is the amount of AGI (or, if greater, earned income) at or above which no credit is allowed. See generally § 32(a), (b), and (n). See also Rev. Proc. 2021-23, 2021-19 I.R.B. 1153. (3) SSN requirement . To claim the earned income credit for taxable year 2021, the eligible individual (and spouse, if filing a joint return) must have a valid SSN issued by the Social Security Administration by the due date of the individual’s Federal income tax return (including

extensions). The individual is not permitted to claim the earned income credit if the individual’s SSN is not valid for employment and was issued for purposes of receiving a federally funded benefit. See generally § 32(c)(1)(E) and (m).

(4) Eligibility . (a) In general . Individuals who are eligible to claim the earned income credit include individuals who have an EIC qualifying child for taxable year 2021, as well as individuals who do not have an EIC qualifying child but satisfy the three following eligibility conditions for taxable year 2021. See § 32(c)(1)(A). First, the individual has a principal place of abode in the United States (determined as provided in § 32) for more than one-half of taxable year 2021. See § 32(c)(1)(A)(ii) (I). Second, the individual (or spouse, if filing a joint return) has attained age 19 (except for specified students who are eligible to claim the earned income credit if they have attained age 24, and qualified homeless youth or qualified former foster youth who are eligible to claim the earned income credit if they have attained age 18). See § 32(c)(1)(A)(ii)(II) and (n). Third, the individual is not a dependent for whom a deduction is allowable under § 151 to another taxpayer for taxable year 2021. See § 32(c)(1)(A)(ii)(III). (b) Eligibility restrictions . An individual who elects for the taxable year to exclude foreign earned income and housing cost amount under § 911 is not an eligible individual for that taxable year. See § 32(c)(1)(C). In addition, an individual is not eligible for the earned income credit if he or she is a nonresident alien individual for any portion of taxable year 2021, unless the individual is treated as a resident of the United States for taxable year 2021 by reason of having made the election under § 6013(g) or § 6013(h). See § 32(c)(1)(D). Lastly, an individual who is the EIC qualifying child of a taxpayer for taxable year 2021 is not eligible to claim the earned income credit for taxable year 2021. See § 32(c)(1)(B). .05 2021 Recovery Rebate Credit and Third-Round Economic Impact Payments .

(1) 2021 recovery rebate credit . Section 9601(a) of the American Rescue Plan added § 6428B to the Code. Section 6428B(a) provides an eligible individual a refundable tax credit against the

eligible individual’s Federal income tax liability (as imposed by subtitle A of the Code) for the eligible individual’s taxable year 2021 (2021 recovery rebate credit).

(a) Definition of eligible individual . Section 6428B(c) defines the term “eligible individual” for purposes of § 6428B to mean any individual other than (i) a nonresident alien individual, (ii) an individual who is a dependent of another taxpayer (as defined in § 152) for the taxable year, or (iii) an estate or trust.

(b) Amount of 2021 recovery rebate credit .

(i) In general . Section 6428B(a) provides that the amount of the 2021 recovery rebate credit equals the sum of (i) $1,400 per eligible individual ($2,800 in the case of a joint return) and (ii) an amount equal to the product of $1,400 multiplied by the number of the eligible individual’s dependents (within the meaning of § 152).

(ii) Reductions in amount due to lack of SSN . If an eligible individual does not have an SSN, or if two eligible individuals who do not have an SSN file a joint return, § 6428B(e)(2) does not allow the $1,400 amount for the eligible individual or the $2,800 amount for the joint return, but will allow an amount for dependents (as defined in § 152) with certain taxpayer identification numbers. Section 6428B(e) (2) reduces the $2,800 amount for a joint return to $1,400 if one spouse has an SSN, one spouse does not have an SSN, and neither spouse was a member of the Armed Forces of the United States at any time during the taxable year. Only a dependent with an SSN or an IRS adoption taxpayer identification number (ATIN) is counted for purposes of determining the amount of the 2021 recovery rebate credit. See § 6428B(e)(2)(C) and (D). For purposes of qualifying for the 2021 recovery rebate credit, any type of SSN is sufficient if it was issued by the Social Security Administration by the due date of the eligible individual’s 2021 Federal income tax return (including extensions). See § 6428B(e)(2) (D)(i).

(iii) Reduction in amount due to AGI . Section 6428B(d) provides phaseouts of the credit amount based on an eligible individual’s AGI.

(iv) Reduction in amount due to receipt of advance payments . Section 6428B(f) reduces the 2021 recovery rebate credit

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amount that an eligible individual may claim by the aggregate refunds allowed to the eligible individual as an advance refund in calendar year 2021 (that is, through the receipt of one or more thirdround economic impact payments).

(2) Economic impact payments . Section 6428B(g) addresses the payment of advanced refunds and credits during calendar year 2021. It authorized a third round of economic impact payments which followed two earlier rounds of advance refunds and credits for taxable year 2020. See §§ 6428(f) (regarding the first round of economic impact payments), 6428A(f) (regarding the second round of economic impact payments). All thirdround economic impact payments under § 6428B(g) have been disbursed.

.06 Revenue Procedure 2021-24 . Rev. Proc. 2021-24, 2021-29 I.R.B. 19, provided two procedures for individuals not otherwise required to file 2020 Federal income tax returns to file returns to receive certain tax benefits. The first procedure, set forth in section 4 of Rev. Proc. 202124, permitted these individuals to file simplified returns to (i) receive advance child tax credit payments during calendar year 2021, (ii) claim the 2020 recovery rebate credit, (iii) claim the additional 2020 recovery rebate credit, and (iv) receive the third-round economic impact payment. The second procedure, set forth in section 5 of Rev. Proc. 2021-24, enabled these individuals who have zero AGI to file complete returns electronically to receive (i) advance child tax credit payments during calendar year 2021 and (ii) the third-round economic impact payment.