Child Tax Credit: How Much Money Will The IRS Send You Each Month?
(CBS New York) -- Most parents are about to start receiving a sort of monthly stimulus check. The Internal Revenue Service (IRS) recently sent letters to approximately 36 million families that may qualify for advance Child Tax Credit (CTC) payments. The Treasury Department and IRS have also announced the official July start date for the updated credit, as laid out in the American Rescue Plan. But according to one poll, half the country doesn't even know about the checks, let alone how much money they can expect.
The Child Tax Credit was established over two decades ago to help qualified taxpayers with the cost of raising children. But the most recent $1.9 trillion COVID relief package seeks to provide parents with a little more support. The credit will be worth as much as $3,600 per kid for the year. And money that was once was claimed only at tax time will go out in installments, at least in 2021.
How much will those installments be, and when will they arrive? Let's find out.
How Much Is The New Child Tax Credit?
For parents of children up to age five, the IRS will pay $3,600 per child, half as six monthly payments and half as a 2021 tax credit. That changes to $3,000 total for each child ages six through 17. The IRS will make a one-time payment of $500 for dependents age 18 or fulltime college students up through age 24.
Payments will be based on the modified 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 an individual and beyond $150,000 for a married couple. 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 what 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 older 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 the 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 a household's Child Tax Credit. The IRS recently confirmed that it will set up a portal to allow claimants to adjust their income and custodial 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 use the portal to opt out of periodic payments in favor of a one-time credit at tax time. The portal should be up and running before July 1.
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) -- where the income limits phase out -- will not be eligible for the expanded credit. But they can still claim the existing $2,000 credit per child.
Families that may be eligible received a qualifying letter in the first half of June. It read, in part, "If you're eligible for advance CTC payments and want to receive these payments, you don't need to take any action. You will receive a letter with more details."
The second letter estimating the amount is pending.
"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..."
When Will The New Child Tax Credit Start?
Child Tax Credit payments will be automatically deposited on a monthly basis starting July 15. Each subsequent payment will be issued on the 15th of the month through December of 2021. If the 15th is a weekend or holiday, the money will arrive on the closest prior business day. (August 15, for example, falls on a Sunday, so that month's payment will arrive August 13.) The remaining balance will be issued as a credit when the recipient files their 2021 taxes. Most of those who are eligible will not have to do anything to receive payments. The payments will just start based on the information the IRS already has on file.
How Long Will The New Child Tax Credit Last?
The revised Child Tax Credit is scheduled to apply to 2021. The rules of reconciliation, which Democrats used to push through 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 of extending the enhanced credit until 2025 as part of his American Families Plan. The plan, worth approximately $1.8 trillion, seeks to address inadequacies in childcare, education and paid leave. A fact sheet on the plan calls it "an investment in our children and our families—helping families cover the basic expenses that so many struggle with now, lowering health insurance premiums, and continuing the American Rescue Plan's historic reductions in child poverty."
A recent statement from the president once again urged Congress to extend the updated Child Tax Credit. "The American Rescue Plan is delivering critical tax relief to middle class and hard-pressed working families with children," the statement reads. "Congress must pass the American Families Plan to ensure that working families will be able to count on this relief for years to come."
Many Democrats want to go a step further and make the revised Child Tax Credit permanent. Massachusetts Representative Richard Neal, chairman of the House Ways and Means Committee, made public back in April a plan to do just that. The suggested change came as part of a broader draft proposal to guarantee paid family leave and access to childcare. How much influence this ultimately has on the American Families Plan is unclear.
The American Families Plan, in its proposed form, faces a tough path through Congress.
What Could The New Child Tax Credit Mean For Families?
The enhanced Child Tax Credit will be available to about 39 million families, accounting for 65 million children, according to the Biden administration. That covers around 88 percent of the nation's children. Approximately 13 percent of households with children faced food insecurity due to lack of money, according to Census data from late May and early June of 2021. About 21 percent of renting households with children were behind on their rent, according to the same data. Early estimates from the Center on Budget and Policy Priorities suggest that expanding the Child Tax Credit will push 4.1 million children beyond 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."
In what appears to be a coincidence of timing, the updated Child Tax Credit will start soon after many states stop accepting the federal unemployment benefit bonus for its citizens. These states, most led by Republicans, have announced the discontinuation of the $300 federal unemployment benefit bonus for their citizens ahead of the official Labor Day end date. Alaska, Iowa, Mississippi, and Missouri stopped benefits on June 12. Alabama, Idaho, Indiana, and Nebraska are among the states that stopped benefits on June 19. Florida, Georgia, Ohio, and Texas follow on June 26. A total of 26 states will cut off federal unemployment benefits early. The additional money from the Child Tax Credit will offset some of the $300 per week that the unemployed will lose.
What Could The New Child Tax Credit Mean For Society And The Economy?
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."
The Center on Budget and Policy Priorities also found that income support leads to better health outcomes. People with more money can generally better provide for their children. That could mean healthier food, better housing, more frequent medical care, less stress, and so much more.
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 February brief, "cash and near-cash benefits increase children's health, education, and future earnings and decrease health, child protection, and criminal justice costs."
According to their 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 Implementation Issues May Arise?
A program to distribute monthly checks to millions of families brings with it plenty of administrative challenges. That's a big reason why payments are scheduled to start four months after the bill was passed. "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."
A blog post from National Taxpayer Advocate Erin M. Collins cites limited resources and technology issues as reasons for delays in processing tax returns. But those shortcomings also affect other initiatives, like the revised Child Tax Credit. Congress has continually reduced the agency's budget over the last decade; funding is down by about 21 percent. That's left the IRS short on what it needs to accomplish its initiatives.
An IRS watchdog informed Congress that budget cuts limit the agency's ability to keep up with technology. The agency has long relied on an old programming language called COBOL. That isn't necessarily a problem, unless the code isn't kept up to date. And the IRS hasn't kept it up to date. So when changes to the tax code come along, the agency has to find and pay programmers to fix things. The IRS initiated a modernization effort in 2019, but it relied on future funding. President Biden is also looking to increase the agency's budget by $1.2 billion in the 2022 fiscal year. None of this will help in the short-term, however.
Sending out Child Tax Credit payments on a regular basis presents unique challenges. 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. A recent Data For Progress poll found that 53 percent of Americans know little or nothing about the revised credit. Nuñez estimates that somewhere around 35 or 40 percent of children who live in poverty also live in households that don't file taxes.
"Those families that make $2,000 a year adjusted income or don't work at all, generally don't file their taxes," says Nuñez. "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 Biden administration has set up a second portal for non-tax filers to sign up. Its focus is on helping the extremely poor and homeless get their benefit.
And then there are those families experiencing some sort of upheaval in their living arrangements. If parents have recently divorced, the IRS won't necessarily have up-to-date information reflecting new households. Payments will likely be issued based on the most recent information available, which may not be accurate or address the current need. These issues will be addressed through a separate portal, the same one as for income adjustments.
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."
Originally published Thursday, May 20 at 11:17 a.m. ET.
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