Child Tax Credit: How Expanded Credit Works And Why It Means More Money To Parents
(CBS Detroit) -- Raising a child is very expensive. But many parents and guardians are about to receive a little more help from Uncle Sam. Along with a $1,400 stimulus check and extended unemployment benefits, the $1.9 trillion COVID relief package signed into law on Thursday expands the Child Tax Credit.
The American Relief Plan increases the 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 periodic basis.
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 periodic basis from July to December of 2021, with the remainder issued when the recipient files their 2021 taxes. (Many expect that "periodic" will actually mean monthly or possibly quarterly, but the IRS still has to determine that.) The benefit will not depend on the recipient's current tax burden. In other words, qualifying families will receive the full amount, regardless of how much -- or little -- they owe in taxes. Payments will start to phase out beyond a $75,000 annual income for individuals and beyond $150,000 for married couples.
As an example, suppose a married couple has a four-year-old and an eight-year-old and earns an annual joint income of $120,000. The IRS could 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.
"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 last 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 is that political pressure from supporters of a widely popular program would force Congress to extend it in the years to come.
"A lot of people were surprised recently because Mitt Romney offered his own child allowance plan that, in some ways, is similar to the Biden plan," Nuñez points out. "But he also made it fully funded by cutting particular tax credits and cutting other programs. So that if they had chosen to go with his plan, it would have been something that could be made permanent, even under reconciliation. So I have a feeling that, in future policy discussion, when it comes up to a vote one day to make it permanent, that his suggestion may be part of the part of the conversation."
What Could This Mean For Families And Society?
The 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. Anywhere from eight to 12 million children currently live in households facing food insecurity due to lack of money, according to recent Census data. 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."
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 looked at how to cut poverty in half.
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."
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. But sending out money on a regular basis presents its own challenges.
And then there's the challenge 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.
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.