Child Tax Credit: 'IRS Not Set Up Currently To Provide Regular Monthly Payments,' Says Expert
(CBS Detroit) -- Sometime later in 2021 raising a child will become a little cheaper for most Americans. The American Rescue Plan Act, which recently became law, increases the Child Tax Credit and changes how it is distributed. What was once $2,000 per child received at tax time will become up to $3,600 divided up and distributed periodically. The change will lift millions of children out of poverty. But that can only happen if the government is able to get the program going.
How Will A Revised 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."
What Could Delay The Program?
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 much the same technological infrastructure they're using 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 led to plenty of issues. The second round went relatively smoothly and ongoing distribution of the third round appears to progressing nicely as well. 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."
The IRS currently faces at least three other big tasks it must accomplish before -- or while -- launching the revised Child Tax Credit. The agency is in the process of sending out approximately 150 million stimulus checks. The American Rescue Plan Act recently signed by President Biden provides for these payments as part of the historic $1.9 trillion stimulus package. They must also implement the $10,200 tax break on unemployment benefits included in that package. Finally, the IRS is in the middle of tax season. The federal submission deadline was pushed back until May 17, but returns continue to roll in. The IRS still faced a severe backlog of about 6.7 million 2019 returns at the end of January. That backlog swells to 24 million returns when accounting for previous years too.
Agency commissioner, Charles Rettig, recognized some of the challenges in front of them at a House Ways and Means Committee meeting last week. "It might be a challenge to get into monthly right out of the box," Rettig said.
He also raised the possibility that an online portal for potential recipients to submit needed information could be delayed due to staffing issues. Congress approved about $2 billion for the agency to add workers and update technology. But any significant upgrade seems unlikely in the three months left to launch the new Child Tax Credit. "The same people who do our income tax processing, IT departments, are the people that need to develop that portal," he said. "So I don't have the resources to devote to that portal until filing season ends, which is May 17."
How Will A Revised Child Tax Credit Help?
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 at Columbia University.
The Center on Budget and Policy Priorities estimates the revised credit will be fully available to families accounting for 27 million children. 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, based on recent Census data. Expanding the Child Tax Credit could push upwards of 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 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."
How Much Does Raising A Child Cost?
The U.S. Department of Agriculture used to issue what was called Expenditures on Children by Families, more commonly known as "The Cost of Raising a Child." Data from 2015, the last year for which the report is available, determined that families of a baby born that year will spend $233,610 to raise the child until age 17. That number rises to $284,570 when accounting for expected inflation. It includes food, housing, childcare and other reasonable expenditures. It does not include the cost of higher education, which ranges from $19,490 per year on average for an in-state student at a public university (after accounting for financial aid) to $33,220 per year on average at a private institution.
The report assumes a middle-class family comprised of two parents and two children. USDA findings suggest that 29 percent is spent on housing, 18 percent on food and 16 percent on childcare. That breakdown can vary widely based on the age of the child and the region of the country where the family lives. Households with multiple children tend to spend less per child due to economies of scale. For example, food bought in large quantities tends to be cheaper per unit.
Richer families spend more per person over the course of their childhood. Poorer families spend less.
Those with limited resources are hit the hardest during pandemics and other economic downturns. And the existing safety net had plenty of holes to fall through. According to Nuñez, "In the middle of a recession, when people have lost their jobs or have had to cut back on hours, these programs fail. They don't provide aid to families, because parents are unable to work, or unable to work as much as they ideally would like. So it really means that aid to children drops because of conditions outside of the control of parents. So providing something like this, which is unconditional -- you get it, regardless of your work status, regardless of how much income -- is a huge change. It makes sure that the neediest families are receiving aid at a time when the need is the greatest."