The child tax credit is a tax credit for parents based on their income level and the number of dependent children they have. This year brought big changes to how the tax credit works and who was eligible to receive it: The American Rescue Plan Act of 2021 temporarily changed the child tax credit to make it more accessible for lower income families and increased the refund amount. The American Families Plan, proposed by the White House in April, aims to make those changes permanent.
How has the child tax credit changed over time?
Initially, the child tax credit provided the biggest benefits to upper- and middle-class families. Congress first enacted the child tax credit in 1998 as a $500 per child non-refundable credit. Non-refundable means the credit could only decrease the amount of federal taxes a parent owed to the Internal Revenue Service (IRS). Families eligible for more credit than they owed in federal taxes did not receive the remaining money. The child tax credit grew to $1,000 per child in 2001. It also became partially refundable, giving parents access to a portion of the credit left over after paying federal taxes.
The refund was equal to 15% of earned income over a certain amount up to the total tax credit available or the maximum refund value, whichever comes first. Before the 2017 Tax Cuts and Jobs Act (TCJA), the income refund threshold was $3,000 and the highest permitted refund was $1,000. The TCJA reduced the income refund threshold to $2,500 and the refund cap increased to $1,400. It also indexed the refund cap to inflation, meaning it would grow along with inflation over time.
The credit per child gradually decreases for higher-income families. The TCJA increased the phase-out threshold from $75,000 to $200,000 for single parents and $110,000 to $400,000 for married couples.
The TCJA also increased the credit per child from $1,000 to $2,000 — though it eliminated the personal exemption, a separate tax program that reduced a family’s taxable income per household member. (The TCJA allowed an additional $500 credit per dependent 17 and older. The changes made under the TCJA are set to expire in 2025.)
Who benefited most from the child tax credit before the American Rescue Plan?
The value received per family fluctuated by the number of dependents and income. People in lower income brackets owed less in federal taxes, meaning they had less opportunity to use the credit and received a smaller share of the leftover credit based on the refund formula. Meanwhile, the phase-out threshold for higher incomes ensured the wealthiest Americans received less credit per child.
The result was a program primarily benefitting middle and upper middle-class families. These families received the largest child tax credits on average in 2019. Married couples in the top 20% to 40% tax bracket received an average payment of $3,951.
The bottom 20% of the income distribution received the least from the child tax credit. For single parents in this lowest bracket, the average child tax credit was $75. For married couples, that increased to $760. One reason was the refund formula. Participation also mattered. The bottom quintile had the lowest percentage of families that claimed the child tax credit at 3%.
How did the American Rescue Plan change the child tax credit?
The American Rescue Plan increased the child tax credit to $3,000 per child older than six and $3,600 per younger child. The plan also raised the age limit of eligible children from 16 to 17 years old. The added $1,000 per child begins to phase out sooner than under the TCJA: $112,500 for single parents or $150,000 for married couples. The rest of the credit decreases at the thresholds set by the TCJA.
The credit also became fully refundable, meaning the full amount can be added to a refund or and eliminated the income requirement for low-income families. Parents who do not file a federal tax return can use the non-filers tool — initially created to send stimulus payments to Americans who had not filed tax returns — to claim the credit.
Filers receive the tax credit in monthly payments or can opt to receive the entire amount with their yearly tax return. Utah had the largest average advance payment amount this year, according to preliminary IRS data.
The American Rescue Plan reforms will expire at the end of 2021 unless made permanent by the passage of the American Families Plan.
