The child tax credit is a tax break for families based on their income level and the number of dependent children they have. 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. That credit expansion expired at the end of December 2022.
How does the child tax credit impact the middle class?
Initially, the child tax credit provided the biggest benefits to upper- and middle-class families. Congress enacted the child tax credit in 1998 as a $500 per child non-refundable credit (meaning the credit could only decrease the amount of federal taxes a parent owed the IRS). Families eligible for more credit than they owed in federal taxes did not receive the remaining money.
The 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 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 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.)
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 American Rescue Plan child tax credit expansion expired at the end of December 2022. The credit is back to pre-pandemic levels: $2,000 for kids 17 and younger.
Who benefited most from the child tax credit before the American Rescue Plan?
The value American families received fluctuated by income and the number of qualifying children. 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 benefiting 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 refund formula meant that the bottom 20% of the income earners 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. The bottom quintile of income earners 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 age seven or older and $3,600 per kids six and younger. It also raised the age limit of eligible children from 16 to 17 years old. The additional $1,000 per child phased out sooner than under the TCJA: $112,500 for single parents or $150,000 for married couples. The rest of the credit decreases at TCJA thresholds.
The American Rescue Plan expansion made the credit become fully refundable, meaning the full amount could be added to a refund and/or 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 received the tax credit in monthly payments or received the entire amount with their yearly tax return. Utah had the largest average advance payment amount in 2021, according to preliminary IRS data.
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