What are the differences between the 2021 Advanced Child Tax Credit and the Additional Child Tax Credit?
The American Rescue Plan provided a complete overhaul of the Child Tax Credit programme, but how has it changed and how much will the new direct payments be worth?
The IRS has announced that it has begun sending letters to all eligible households informing them that they will be receiving the new Child Tax Credit from next month. The White House estimates that around 88% of American children will be covered by the new programme, but how does it differ from what went before?
Previous Child Tax Credit was not fully refundable
In the past the Child Tax Credit was exactly that; a single tax credit which could be used to lower your tax bill at the end of each year. However this meant that low-income filers, who therefore paid little or no tax, were not given the full benefits.
Essentially the tax credit could only reduce your bill to zero, rather than be used to provide a refund.
However to counter this the IRS offered the Additional Child Tax Credit, which allowed families to receive a proportion of the credit as a refund if their tax bill is small. This figure was limited at $1,400, which meant that low-income households missed out on some of the $2,000 credit.
The partially-refundable credit had been in place for decades but it offered no flexibility for families and the single annual payment made budgeting more difficult. In his American Rescue Plan, President Biden completely reshaped the programme to make it more beneficial for working families.
What is the new Child Tax Credit?
The recently distributed letters aim to explain the new-look Child Tax Credit, which has some key differences to the old system. Firstly, the credit is entirely refundable so there is no limit on the amount that low-income families can receive in federal relief.
Secondly, the support is now much more generous with annual payments worth up to $3,600 for children younger than six and $3,000 for those aged between six and 17.
But the most crucial change may be that the support is now offered in the form of monthly direct payments to be paid in advance. The $3,600/$3,000 is no longer sent in a lump sum at the end of the tax year, but on a monthly basis to provide a steadier stream of support.
The programme is set to go live next month with the first payments going out on the 15 July. The IRS will send out six monthly payments before the end of 2021, with the remainder of the money being offered as a single cash payment after filing the year’s taxes.
Current legislation only provides funding for this new programme for 12 months, but President Biden is desperate to see it extended. His American Families Plan will see it last until the end of 2025 and there is widespread desire from within the Democratic Party for the Advanced Child Tax Credit to be made permanent.