June 21, 2021
Senior State Policy Analyst
June 21, 2021
On July 15, the U.S. Treasury will begin mailing monthly checks to families with children who are eligible for the Child Tax Credit (CTC). Previously, the maximum credit was $2,000 per child, but for 2021, President Biden’s American Rescue Plan broadened the credit to $3,600 for each child under six and $3,000 for children over six. The expansion also made eligible children whose parents’ incomes were too low to qualify for the previous credit, both addressing a fundamental policy flaw and taking a significant step to reduce child poverty. This is the first time that the federal government is sending advanced partial payments to eligible families. ITEP has produced a distributional analysis that reveals how families of various income levels will be affected by the temporary expansion. Below are answers to some commonly asked questions about our analysis and the CTC expansion.
How is the CTC expansion different from the existing CTC?
Under the American Rescue Plan Act (ARP), the CTC was expanded in three meaningful ways for tax year 2021:
- The maximum credit increased from $2,000 to $3,000 for most children, with an additional $600 for each child under age six. This full credit boost benefits families with incomes up to $150,000 for married couples and $112,500 for individual heads of household—at which point the expansion starts phasing out.
- The plan made the credit fully refundable, meaning that families with low incomes can now receive the full credit regardless of their level of earnings or overall personal income tax liability. Specifically, it removed a rule that limited the refundable portion of the credit to a percentage of earned income in excess of $2,500. In practice, this puts more money in the pockets of our nation’s lowest-income families and makes the credit available to nearly all children regardless of their parents’ income. More than one-third of children live in families whose earnings were too low to qualify for the full benefit of the federal CTC before this reform.
- The plan expanded the age eligibility of the credit to include 17-year-olds. The credit had previously been available to children this age, but they were removed under the 2017 Tax Cuts and Jobs Act (TCJA).
Explain the average income boosts for families across the income spectrum.
This policy provides benefits to most families with children, but it’s also strategically targeted to provide the largest benefit to those families toward the lower end of the income scale who have been left behind in so many ways by an economy that doesn’t work for them. The bulk of the benefit (68 percent) goes to the bottom 60 percent of families who earn less than roughly $70,000 a year.
If the CTC expansion is extended into 2022, for example, the bottom 20 percent of families (with incomes below $22,400) would see a 35 percent boost in income. Families with children with incomes between $22,400 and $42,500 would see a 9 percent income boost, or an average credit exceeding $3,000. And families with incomes between $42,500 and $69,900 would enjoy a 5 percent income boost, an average credit of more than $2,500.
You mentioned that ITEP’s analysis finds the lowest-income 20 percent will see an income boost of 35 percent. Can you expound on that?
Families earning less than $22,400 a year will receive an average benefit increase or income boost of $4,470. The boost depends on family size and previous eligibility for the full credit. It’s an enormous boost to the economic security of low-income families with children. A 35 percent income gain will meaningfully improve these families’ quality of life, giving them more resources to meet their basic needs. We know that it’s much more difficult for children to succeed when they face housing or food insecurity or when their parents face daily stress due to limited resources. The CTC alone isn’t going to end economic hardship, but a 35 percent annual income boost will have a tangible impact on family economic wellbeing for the most vulnerable families.
What does this expanded Child Tax Credit mean for all families with children? In other words, what do those families look like, how much money do they make? What percentage of families or children will get this credit?
About a quarter of households overall would benefit from these enhancements in 2022. Within those households are more than 68 million children who would feel the impact of the enhanced credit.
Again, the benefits would be broadly distributed to households with varying financial circumstances. But by moving toward full refundability, the poorest 20 percent—with income of less than $22,400—would tend to see the largest benefits.
Another notable improvement is that this CTC expansion rights historical wrongs and make this policy more race-neutral. My colleagues Jenice R. Robinson and Meg Wiehe wrote about it recently here: https://itep.org/president-bidens-child-tax-credit-proposal-could-right-a-historical-wrong/. Previous limits on refundability prevented nearly all low-income families with children from receiving the full credit, effectively leaving behind close to half of all Black and Hispanic children.
However, there are still more areas for improvement in the CTC‘s design. Even in its enhanced form, the federal CTC continues to leave behind more than 1 million non-citizen children who remain ineligible for the refundable credit. More on that impact in each state available here: https://itep.org/inclusive-child-tax-credit-reform-would-restore-benefit-to-1-million-young-dreamers/.
Since families are getting this credit as a payment beginning in July, will their 2021 taxes look different, or will they owe taxes?
This is an advanced refundable credit, so taxpayers who do not opt out of the advance, monthly payments will have a different tax situation when they file 2021 taxes next year. People absolutely should explore their options if they prefer to get the credit to offset taxes owed or are concerned about whether advance payments will mean, for example, a smaller refund next tax-filing season. But, to be clear, families absolutely will not owe more taxes because of this credit and, in fact, the vast majority of families will pay less. Here is a resource: https://www.childrensdefense.org/child-tax-credit-resources/.
Is the way the current policy is structured good? Why give to families as advanced monthly payments instead of simply providing the credit when they file returns?
It’s definitely an improvement. These $250 or $300 per-child monthly payments will come available to families for the first time this July. A monthly payment structure offers a more stable and regular benefit than a yearly payment for families who need support to put their children in childcare or have jobs in which they may work 20 hours one week and 40 hours another. Housing payments, food, transportation and other necessities are daily or monthly expenses, not just once a year. Also, by boosting incomes throughout the year, families with children can avoid taking on expensive debt to cover their basic needs. This is a step toward mitigating the high cost of being poor in the United States.
President Biden’s American Families Plan has proposed to extend this expanded credit for five more years. What impact do you think this will have on families? Is this essentially using tax policy as social policy?
There’s no reason for this to be a one-off policy change. The children and families helped the most under this policy change need economic security every year, not just in 2021.
Extending this credit would offer immense benefits to families with children. In 2022 alone, it would provide a $111 billion collective income boost to roughly 90 percent of children living in the United States. A recent analysis by Columbia University’s Center on Poverty & Social Policy found that the proposed reforms to the CTC under the American Families Plan would lift 4 million children out of poverty and 1.6 million children out of deep poverty, cutting deep poverty among children in half.
Unfortunately, tax policies in virtually every state make it harder for those living in poverty, or near poverty, to make ends meet. Nearly every state and local tax system takes a much greater share of income from middle- and low-income families than from the wealthy.
This is a reform that gives us a better tax code and a more just nation.
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