Child Tax Credit: Your First Check Is Less Than A Month Away
(CBS New York) -- Raising a child is expensive. In the coming weeks, the revised Child Tax Credit will help defray those costs for parents a little more. President Biden's American Rescue Plan, passed in mid-March, changes the amount of the credit and how it's distributed. The $1.9 trillion COVID relief package increases the benefit from $2,000 to as much as $3,600, depending on the child's age and the family's income. And qualifying parents will receive payments monthly rather than only at tax time. Payments will start this summer.
While these and other details have been available for months, one key piece of information remained murky -- the program's start date. The Treasury Department and Internal Revenue Service (IRS) have since ended the suspense.
When Do Payments 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 nearest prior business day. (August 15th falls on a Sunday, so that month's distribution will arrive on August 13.) The remainder will be credited to a recipient's 2021 taxes. Most eligible parents will not have to do anything to receive the money. It will just start arriving based on the information the IRS already has on file.
How Long Will Payments Last?
The revised Child Tax Credit is scheduled to apply only 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 the program will be widely popular, leading supporters to force Congress to extend it.
Biden has since come out in favor 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, put forth 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 has on the American Families Plan is unclear.
The American Families Plan, in its proposed form, faces a tough path through Congress.
Who Will Be Eligible And For How Much?
In early June, the IRS sent a letter to millions of Americans. It read, in part, "You may be eligible to receive advance payments of the Child Tax Credit (CTC). 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."
But what does this mean exactly?
For parents of children up to five years old, the IRS will pay a total of $3,600, half as six monthly payments and half as a 2021 tax credit. That amount changes to $3,000 total for each child ages six through 17. The IRS will make a one-time payment of $500 for dependents who are 18 years old or fulltime college students up through age 24.
Payments will be based on the adjusted gross income (AGI) reflected on a parent or parents' 2020 tax filing. (AGI is the sum of 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; it will not depend on the recipient's current tax burden. Qualifying families will receive the total amount, regardless of how much -- or how little -- they owe in taxes. There is no limit to the number of dependents that can be claimed.
For example, suppose a married couple, with an annual joint income of $120,000, has a three-year-old and a nine-year-old. 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 from July 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 a one-time payment of $500, not $3,000 spread over six months and a tax refund the following April.
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 is creating the Child Tax Credit Update 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 by July 1.
Eligibility requires that the dependent be at least half supported by the taxpayer and part of the household for at least half of the year. 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.
"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..."
What Could This Mean For Families?
The enhanced Child Tax Credit would 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 young. Approximately 13 percent of households with children faced food insecurity due to lack of money, according to Census data from early June of 2021. Around 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 looks like a coincidence of timing, the updated Child Tax Credit will start around the time that more than half of all states stop accepting the federal unemployment benefit bonus for their citizens. Louisiana's benefits end on July 31. Maryland is ending theirs on July 3, and Florida on June 26. They join Arizona, Texas and many other mostly Republican-led states. The additional money from the Child Tax Credit will offset some of the $300 per week that an estimated 4 million unemployed Americans will lose.
What Could This 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 2019 report 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 pay off in the long run, on both the individual and national level. 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. Those challenges include 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.
"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 current 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 dealt with 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 Wednesday, May 19 at 10:50 a.m. ET.
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