The Advance Child Tax Credit (ACTC) is a program introduced by the U.S. government to provide immediate financial relief to families with children. Its goal is to make the child tax credit more accessible, giving parents and guardians an opportunity to receive some of their tax benefits upfront rather than waiting until the end of the year. In this article, I will explain the details of the Advance Child Tax Credit, how it works, and why it matters to so many American families.
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What Is the Advance Child Tax Credit?
The Advance Child Tax Credit is a modification of the Child Tax Credit (CTC), a federal tax credit provided to taxpayers who have qualifying children under the age of 18. Under the standard CTC, parents or guardians receive a lump-sum tax credit when they file their tax returns. However, with the Advance Child Tax Credit, the government distributes part of this credit in periodic payments throughout the year, which means families don’t need to wait until tax season to receive the benefit.
The advance payments were first introduced under the American Rescue Plan (ARP) in 2021, as part of a broader stimulus package designed to help households recover from the financial impact of the COVID-19 pandemic. Although this was a temporary measure for the 2021 tax year, it significantly increased the CTC’s benefits and made them more accessible to low- and moderate-income families.
Key Features of the Advance Child Tax Credit
The key difference between the Advance Child Tax Credit and the standard Child Tax Credit is the timing and frequency of payments. Here’s a breakdown of the main features:
- Payment Frequency: Instead of waiting until tax season, families began receiving monthly payments from July 2021 to December 2021. These payments were distributed on the 15th of each month, and the total amount for the year was split into equal installments.
- Amount of Credit: In 2021, the CTC was increased from $2,000 per child to $3,600 for children under the age of 6 and $3,000 for children ages 6 through 17. The advance payments reflected these new amounts, meaning eligible families could receive monthly installments of up to $300 per child under 6 and $250 per child ages 6 through 17.
- Eligibility Criteria: To qualify for the Advance Child Tax Credit, families needed to meet certain income thresholds. The credit phased out for households with an income above $75,000 for single filers, $112,500 for heads of household, and $150,000 for married couples filing jointly. The full credit was available to those who earned less than these thresholds, and the amount gradually reduced as income increased.
- Automatic Enrollment: Most eligible families were automatically enrolled in the program based on their 2020 or 2019 tax returns. However, individuals who did not file taxes in those years could still claim the credit by filing a 2020 tax return or using the IRS Non-Filer Tool.
The 2021 Changes and Temporary Nature of the Advance Payments
The temporary increase in the Child Tax Credit was one of the major features of the American Rescue Plan. This expansion meant that families with young children saw a significant increase in their monthly payments. Prior to 2021, the maximum CTC was $2,000 per child under 17, and only up to $1,400 of that was refundable. The new legislation expanded this refundable portion to $3,600 for children under 6 and $3,000 for children between 6 and 17.
This change was significant, particularly for low-income families. Previously, many lower-income households did not benefit fully from the CTC because the non-refundable portion did not apply to their tax liability. The increased refundability of the credit allowed more families to access the full benefit, including those who had little or no tax liability.
Here’s an example to illustrate how the payments worked:
Example:
Let’s say I’m a single parent with two children, one aged 4 and the other 8. Under the American Rescue Plan, I would be eligible for $3,600 for my 4-year-old and $3,000 for my 8-year-old. The total amount I would receive for the year would be $6,600, split into monthly payments of $300 for the younger child and $250 for the older child.
For the months of July through December, I would receive $550 per month, for a total of $3,300 by the end of the year. The remaining $3,300 would be claimed when I file my 2021 tax return.
How the Advance Payments Are Calculated
The IRS used the information provided in tax returns to determine the amount of the advance payments. However, they adjusted the payments based on the number of children in a household and their ages, as well as household income.
For families who filed taxes for the previous year, the IRS used the tax returns to calculate the monthly payments. Those who had a qualifying child under the age of 18 in 2021 received the monthly installments. However, if the number of children or household income changed during the year, families could use the IRS portal to update their information to reflect these changes. For example, if a child turned 6 during the year, the family would see a decrease in their monthly payment.
The IRS set up a Child Tax Credit Update Portal to allow families to manage their payments and update their information. This portal gave parents the flexibility to:
- Opt out of the advance payments: Some families preferred to wait until tax season to receive their full credit rather than receive smaller payments throughout the year. They could choose to opt out of the monthly payments through the portal.
- Update personal information: If there were changes in a household’s income, number of children, or other qualifying factors, families could update their information to ensure the correct amount of credit.
- Track payments: Families could also check their payment history and confirm whether they had received all the monthly installments to which they were entitled.
The Impact of the Advance Child Tax Credit on Families
The Advance Child Tax Credit had a profound impact on families, especially those with lower incomes. Many families used the monthly payments to cover everyday expenses, such as groceries, rent, and utility bills. These monthly payments provided a financial cushion for households, offering relief from economic instability.
The 2021 expansion of the CTC also significantly reduced child poverty. According to estimates from the Center on Poverty and Social Policy at Columbia University, the expanded CTC could reduce child poverty in the U.S. by over 40%. This was a critical step toward addressing income inequality and providing much-needed support to families that are struggling financially.
However, the benefits were not evenly distributed across all demographic groups. Families in higher-income brackets still received a substantial amount of financial support, but the biggest impact was felt by those at the lower end of the income spectrum. For example, a family of four earning $40,000 per year would receive the full amount of the increased CTC, which could mean the difference between making ends meet and falling behind on bills.
Is the Advance Child Tax Credit Here to Stay?
While the Advance Child Tax Credit was initially introduced as a temporary measure, many advocates for low-income families are pushing for the permanent expansion of the CTC. There is a growing belief that providing direct financial support to families with children is one of the most effective ways to reduce poverty and improve the economic well-being of households across the country.
In 2022, the Biden administration and some lawmakers expressed interest in making the expanded CTC permanent. However, efforts to extend the advance payments beyond 2021 faced significant challenges. The expansion of the CTC was not extended in the Build Back Better Act, and as of now, the increase in payments is set to expire. This means that for the 2022 tax year, the credit reverted to its pre-2021 levels.
Nevertheless, the success of the Advance Child Tax Credit has sparked ongoing debates about how best to support American families. There’s a growing call for lawmakers to permanently expand the credit or find alternative ways to provide similar assistance.
Conclusion
The Advance Child Tax Credit has had a significant impact on American families, especially those with lower incomes. By providing monthly payments, the government made it easier for parents and guardians to access the benefits of the Child Tax Credit and use the funds to support their families. Although the advance payments were a temporary measure, the success of the program has prompted discussions about the future of the credit and whether it should be made permanent.
As a taxpayer and a parent, I’ve seen firsthand how the financial support from the Advance Child Tax Credit helped families like mine. Whether or not the expanded CTC is made permanent, the lessons learned from the program could shape future policy decisions that prioritize the financial well-being of children and families in the U.S.
