The expansion of the Child Tax Credit is considered one of the most significant tax changes in President Joe Biden's $1.9 trillion American Rescue Plan, given the measure will pay outto millions of families. But the IRS is warning that families may face delays in receiving the checks as it grapples with sending stimulus checks and handling its current tax season duties.
The relief bill overhauled the Child Tax Credit (CTC) by expanding the benefit from $2,000 annually to as much as $3,600 per child, including more low-income families in the tax benefit — and doling out half of the money through monthly cash payments. Those monthly payments are scheduled to start in July and run through December, and could provide a measure of financial stability to millions of families as the economy begins to recover from the pandemic.
"It might be a challenge to get into monthly right out of the box," IRS commissioner Charles Rettig told lawmakers on Thursday. He added that the tax agency would "do our best."
The IRS is under enormous strain given the pandemic and the additional workload from the latest round of stimulus checks. On Wednesday, it reported delivering 90 million stimulus checks to eligible adults and dependents, with plans to issue millions more over the next few weeks. At the same time, it is in the midst of the ongoing tax filing season, and this week pushed back thefrom its traditional April 15 deadline.
That delay in the filing deadline could put the Child Tax Credit timing at risk, Rettig said. He added that he wasn't in favor of delaying the tax deadline because it will give the IRS less time to create a new online portal for the Child Tax Credit.
"We now have one month less to do the development," Rettig said. "The same people who do our income tax processing, IT departments, are the people that need to develop that portal. So I don't have the resources to devote to that portal until filing season ends, which is May 17."
Rettig didn't provide many details about the portal. But it could be similar to the site IRS created last year for the distribution of stimulus checks called "Get My Payment," which the agencyto allow people to track the payment of the third round of stimulus checks.
How the Child Tax Credit works
Before the expansion, the CTC provided a tax credit of $2,00 per child, which families could claim on their annual tax return. Typically, families would receive the money via their tax refund.
But not everyone qualified for the full CTC — and it was mostly lower-income families who didn't get the full payments because of income requirements. About 40% of the tax credit went to families earning more than $100,000, while only 15% was directed to households with less than $30,000 in income, a Brookings study noted. Previously, only those who paid income taxes qualified for the CTC, which left out many very low-income people.
The American Rescue Plan expands the credit to include low-income families, but it also has an income cap of $75,000 for single people and $150,000 for married couples. Households that earn above the income cut-off will still receive the $2,000 tax credit. But the millions of families that earn below that threshold will receive the expanded credit, which is $3,600 for each child under 6 and $3,000 for each child between 6 to 17.
The tax credit will be split between monthly payments between July through December, with the other half claimed on tax returns. In practice, that means a family of four with two children under 6 will qualify for $7,200 in tax credits, with half of that paid monthly in the second half of the year — or $600 per month for six months.
That monthly payout could provide a "baby step toward universal basic income," one expertearlier this month.
About 4 million children will be lifted out of poverty by the tax expansion, according to the Center on Budget and Policy Priorities.
Rettig said he's hopeful the IRS will be able to meet the requirement to start sending out checks in July. He also urged everyone to file a tax return this year, including low-income people who otherwise wouldn't be required to file an annual return, to make sure the IRS is aware of them and can direct the payments to them.