(CBS San Francisco) — Raising a child costs a lot of money. Government estimates put the number at over $230,000 per child, not including college, and that figure can be even higher based on the local cost of living. The Child Tax Credit was originally implemented over two decades ago to lessen the financial burden. And millions of parents and guardians are about to receive some more help from Uncle Sam. The American Rescue Plan, signed into law in March, raises the credit amount and changes how it’s implemented.
The $1.9 trillion COVID relief package increases the Child Tax Credit from $2,000 to up to $3,600, depending on the child’s age and the family’s income. Qualifying parents will not have to wait for their tax refunds to see that money either. Payments will be issued on a monthly basis starting this summer.
How Will The Expanded Child Tax Credit Work?
According to the stimulus package, the Internal Revenue Service (IRS) will pay out $3,600 per year for each child up to five years old and $3,000 per year for each child ages six through 17. Payments will be issued automatically on a monthly basis from July to December of 2021, with the remainder issued when the recipient files their 2021 taxes. (IRS Commissioner Charles Rettig recently confirmed a July launch “with payments going out on a monthly basis.”) The IRS will pay $500 for dependents age 18 or fulltime college students up through age 24, but only once.
Payments will be based on the adjusted gross income (AGI) reflected on a parent or parents’ 2020 tax filing. (AGI is the sum of one’s wages, interest, dividends, alimony, retirement distributions and other sources of income minus certain deductions, such as student loan interest, alimony payments and retirement contributions.) The amount phases out at a rate of $50 for every $1,000 of annual income beyond $75,000 for individuals and beyond $150,000 for married couples. The benefit will be fully refundable, meaning it will not depend on the recipient’s current tax burden. Qualifying families will receive the full amount, regardless of how much — or little — they owe in taxes. There is no limit to the number of dependents that can be claimed.
As an example, suppose a married couple has a four-year-old child and an eight-year-old child and showed an annual joint income of $120,000 on their 2020 taxes. The IRS would send them a monthly check for $550 starting in July. That’s $300 per month ($3,600 / 12) for the younger child and $250 per month ($3,000 / 12) for the older child. Those checks would last through December. The couple would then receive the $3,300 balance — $1,800 ($300 X 6) for the younger child and $1,500 ($250 X 6) for the younger child — as part of their 2021 tax refund.
Parents of a child who ages out of an age bracket will be paid the lesser amount. That means if a five-year-old turns six in 2021, the parents will receive a total credit of $3,000 for they year, not $3,600. Likewise, if a 17-year-old turns 18 in 2021, the parents will receive $500, not $3,000.
An income increase in 2021 to an amount above the $75,000 ($150,000) threshold could lower your Child Tax Credit. The IRS will reportedly set up a portal to allow claimants to adjust their income information, thus lowering their payments. Failure to do so could increase your tax bill or reduce your tax refund once 2021 taxes are filed. Recipients will also be able to opt out of periodic payments in favor of a one-time payment at the end of the year.
Eligibility requires that the dependent be a part of the household for at least half of the year and be at least half supported by the taxpayer. A taxpayer who makes above $95,000 ($170,000) will not be eligible for the expanded credit. But they can still claim the existing $2,000 credit per child.
“Big changes to the way that the tax credit is structured,” says Stephen Nuñez, the Lead Researcher on Guaranteed Income at the Jain Family Institute, an applied research organization in the social sciences. (Nuñez studies cash welfare policy, that includes field work to answer policy-relevant questions about the social safety net.) “Much more generous, fully refundable, no longer any work requirement and the possibility that it would be paid out on either a quarterly or even monthly basis.
How Long Will The Revised Child Tax Credit Last?
The newly revised Child Tax Credit will last only one year. The rules of reconciliation, which Democrats used to pass the stimulus package containing the expanded credit with a simple majority, don’t allow for deficit spending. Legislation must be deficit-neutral or deficit-reducing for the year, as well as for the next five years and 10 years. The thinking was that political pressure from supporters of a widely popular program will force Congress to extend it in the years to come.
Biden has since come out in support extending the enhanced credit until 2025 as part of his American Families Plan. The plan, worth approximately $1.8 trillion, seeks to address childcare, education and paid leave. Its recent announcement follows the $2.3 trillion American Jobs Plan announced at the end of March to address the country’s infrastructure issues.
Many Democrats, however, want to make the Child Tax Credit permanent. On Tuesday, Massachusetts Representative Richard Neal, chairman of the House Ways and Means Committee, made public a plan to do just that. The suggested change came as part of a broader draft proposal to guarantee paid family leave universal and access to childcare. How much influence this has on the American Families Plan remains to be seen.
What Could This Mean For Families, Society And The Economy?
The enhanced Child Tax Credit would be fully available to families accounting for 27 million children, according to the Center on Budget and Policy Priorities. That covers approximately half of all Black and Latino children, whose families have been hit particularly hard by the economic fallout from the COVID pandemic. The Institute on Taxation and Economic Policy believes that households accounting for 83 million children would benefit to some degree. Anywhere from eight to 12 million children live in households facing food insecurity due to lack of money, according to recent Census data from late 2020. Estimates suggest that expanding the Child Tax Credit would push 9.9 million children beyond or closer to the poverty line.
“It’s a lot more generous,” Nuñez confirms. “It’s fully refundable, and it no longer has a work requirement. So that means that it is going to be particularly important for the poorest households, those who earn nothing, or who earn less than $2,500 a year in taxable income. There have been some simulations, some analyses of this particular plan that suggest that these changes are enough on their own to cut the child poverty rate in the United States by somewhere around 40 percent.”
“So it’s actually a huge impact on child poverty in the United States, Nuñez continues. “And this is consistent with what we’ve seen happen in other countries that have also introduced something like a child allowance. So, this kind of policy, although it’s implemented and administered in different ways in different countries, is fairly common. It exists in Canada, it exists in the UK, in Germany, and other places in the world. And, in those places, it has had very similar results, cutting child poverty by a third or by 50 percent, relative to the baseline.”
“It’s good that we’re reducing poverty,” says Yeva Nersisyan, Associate Professor of Economics at Franklin & Marshall College. “And the fact that we could reduce it with a tax credit increase that’s not dramatic — we might be almost doubling it, but in dollar terms is not that much — so the fact that we could have done that and we hadn’t done it sooner, I think it’s kind of outrageous. But it also tells you that the way we think about poverty — the poverty line, where were we put it (which is at an annual income of $26,500 for a family of four) — it’s not really realistic.”
“So that’s why a little bit more money can push you over the poverty line,” Nersisyan continues. “But that doesn’t necessarily mean you’re not poor in a more realistic sense.”
Some research suggests that reducing poverty would also have knock-on effects in the broader economy. The National Academies of Science, Engineering and Medicine released a report in 2019 called A Roadmap to Reducing Child Poverty that looked at how to cut poverty in half. It concluded that “the weight of the causal evidence does indeed indicate that income poverty itself causes negative child outcomes, especially when poverty occurs in early childhood or persists throughout a large portion of childhood.”
As Nuñez explains, “the reason why they’re interested in reducing child poverty, in addition to child poverty being bad, is that there’s some research that suggests that child poverty costs the U.S. economy, somewhere in the range of 800 billion to $1.1 trillion each year, because of higher crime, because of poor health outcomes for poorer children, and lower income levels, when they grow up. If you believe that estimate is largely correct, then cutting child poverty in half could have an enormous benefit to the economy as well. So not only is it helping children, reducing suffering. But in the U.S., these sorts of programs could pay for themselves.”
The investment could very well pay off in the long run, on both the individual and national scale. People would be healthier and better educated, and then grow up to be more productive members of society. As the Center on Poverty and Social Policy at Columbia University points out in a recent brief, “cash and near-cash benefits increase children’s health, education, and future earnings and decrease health, child protection, and criminal justice costs.”
According their recent calculations, “converting the current Child Tax Credit to a child allowance … would cost about $100 billion and would generate about $800 billion in benefits to society.”
In a more theoretical sense, the Child Tax Credit will make the tax structure a little more progressive. Those earning less in income will ultimately pay less in taxes because of the credit. And by comparison, those earning more will pay more. As Nersisyan points out, “any policy that makes your tax system more progressive is good for demand, because people at the lower end of the income distribution tend to have a high propensity to consume. So if you give $1 to somebody who’s close to the poverty line, they’re likely to spend all of that money. If you give an extra dollar to somebody who’s making $200,000 or $300,000 a year, they’re not likely to spend a lot of that dollar. They’re likely to save most of it.”
“It keeps demand higher in the economy,” Nersisyan continues. “Higher demand is good because then that encourages more investment, increases productivity and so on so forth.”
What Issues May Arise In Implementation?
A program to distribute periodic checks to millions of families brings with it plenty of administrative challenges. That’s a big reason why payments aren’t scheduled to start until July. “They’re going to be standing up a program that is very operationally complex,” according to Nuñez. “The IRS is not set up currently to provide regular monthly payments or regular quarterly payments. It’s just not something that they’ve done historically. There’s also been at least a decade of underfunding. So they’re also fairly poorly funded at this point.”
The IRS will use the same technological infrastructure they’ve used to send out stimulus checks. And those systems are outdated. Sending out checks has depended on old hardware and a software programming language not much used in decades. Distribution of the first stimulus check had plenty of issues. Many eligible recipients experienced delays. The second round went relatively smoothly, as well as the third. But sending out money on a regular basis presents its own challenges.
And then there’s the task of finding all the people who should receive the money, communicating to them that this money is out there and they qualify for it, and then getting them into the system. Nuñez estimates that somewhere around 35 or 40 percent of children who live in poverty also live in households that don’t file taxes. “In order to receive aid, you’re going to have to file your taxes,” Nuñez says. “So those families that make $2,000 a year adjusted income or don’t work at all, generally don’t file their taxes. And those are the families that are going to receive the most out of this kind of benefit. So there’s going to be a big push. There’s going to have to be a very big push, where government works with nonprofit partners and others in the field to identify and reach out to these sort of most vulnerable families, the ones that are going to benefit the most from this, and make sure that they understand that this benefit exists and how to get it.”
Implementation challenges in the initial stages shouldn’t detract from the passage of a program that could change the lives of millions. According to Nuñez, “the big takeaway is even if this is a rough start, even if it has some implementation challenges and on the margins, some people are not getting it that we’d like to get, it’s still going to have a huge impact.”
What Was Wrong With The Previous Child Tax Credit?
The previous Child Tax Credit delivered some relief to parents and guardians. It reduced one’s taxes by up to $2,000 per child per year. But the only way to claim it was by filing taxes. Any additional refund above a filer’s tax burden was lost, unless they qualified for the Additional Child Tax Credit. And even that was capped at $1,400. As Nuñez notes, “families that don’t make at least $2,500 a year in taxable income cannot qualify for it.”
As a result, approximately 33 percent of all children come from families that didn’t make enough money to receive the full benefit, and 10 percent of children received no benefit at all, according to the Center on Poverty and Social Policy.
There were other issues that limited the credit’s effectiveness for those supporting families. The child had to be a U.S. citizen living under the same roof, 16 years old or younger, and claimed as a dependent, among other criteria. The residency requirements were complicated and out of step with the structure of many modern American families. Children often live with other family members, for example, or shuttle between the homes of separated parents. Dependent children age 17 or older didn’t qualify (though they may qualify for the dependent care credit). Payments were issued as tax refunds. So those who didn’t file taxes or earn enough to qualify for the full credit — often among the poorest workers — missed out on all or some of the benefit. And even those who did file had to wait for a refund the following year.
The credit disproportionately helped the middle class rather than the poor. Families making more than $100,000 per year received approximately 40 percent of the credit, while families making less than $30,000 received approximately 15 percent.
Originally published on April 23 at 5:30 p.m. ET.
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