The Advance Child Tax Credit: What It Is, How We Got Here, and the Tax Impact

The Advance Child Tax Credit is a new program designed to help American families in financial risk by providing cash into the hands of those who can best use it. The alternative before this most recent change per the American Plan Rescue Act was to wait until the Income Tax Return (Form 1040) was filed and to receive the additional funds as part of the refund. Now, cash is appearing in people’s bank accounts on a monthly basis!

How did we get here?

What is the Child Tax Credit? It was originally enacted as part of the Taxpayer Relief Act of 1997, at $400 per child. The Credit has changed and increased over the years, most recently to $2,000 per child if under the age of 16, as part of the Tax Cut and Jobs Act of 2017.

This Act also allowed up to $1,400 per child to be refundable or for the taxpayers to receive extra cash back with their tax refund; before, the credit could only be used to reduce tax liability to zero.

There has always been an income cap on this; taxpayers earning in the millions did not qualify for this credit. The current income limit is about $400,000 for Married Filing Joint taxpayers.

The American Plan Rescue Act (passed in 2021) ups the ante and turns this on its head by advancing the potential credit refund to the filers during the year rather than waiting for the return to be filed the following year. It also increases the amount of the credit.

The Advance Child Tax Credit now has a maximum of $3,600 per child for 2021. The IRS can determine from prior year filing which taxpayers are eligible to receive the funds PLUS they already have Direct Deposit bank information on file for many of these taxpayers. In June 2021, it was announced the program would start, and cash began disbursing in July.

What could you get?

For example, a family with an Adjusted Gross Income of $80,000 with one child four years old would qualify for the maximum of $3,600 credit. In monthly terms, that equates to $300 per month. This is the amount that would have been Direct Deposited into the family’s bank account each month starting July 2021. There are clear instructions by the Internal Revenue Service on how to opt out of these payments for those that don’t wish to receive them.

One positive of this change is that it gets money into the hands of those who need it much quicker during the year. That may help the general economy as well as that family.

One negative is that some families purposely plan for a higher refund for savings purposes. This would lessen the refund as some of the cash was already received. A second is that if the family’s situation changes by family income increasing tremendously, then they may not be eligible for any Child Tax credit when filing. Their refund would then be lowered by the amount of the credit advanced.

How to proceed?

The IRS will issue Letter 6419 in early 2022, around the same time frame as when W-2s are received, to document the amount of the Advance Child Tax Credit received. This Letter will document how much Advance Child Tax Credit was sent to you and will get used in the preparation of your individual income tax return.

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