The expansion of the child tax credit that passed in the American Rescue Plan could cut child poverty dramatically, studies suggest. But the provision is in place for only a year, setting up a fight about whether the expansion could become permanent — and what it will look like. Here’s what we know.
How much do families get from the child tax credit?
For a year, the tax credit goes up from $2,000 to $3,000 for children ages 6 to 17. Families with children under the age of 6 will get $3,600 per child. One of the biggest changes is an expansion of how many people get the aid.
Previously, families who didn’t earn enough money and who didn’t owe anything in income taxes could not get the full credit. The new law changes that for a year, making the child tax credit “fully refundable,” meaning more poor families will get it. That makes it available to 27 million kids who could not previously access it, including about half of all Black and Latinx kids.
About 10 million children will be lifted to or above the poverty line.
- A single mother with one young child who is a home health aide and earns $10,000 a year gets $3,600 annually, up from $1,125 before, according to estimates from the Center for Budget and Policy Priorities, a liberal think tank.
- A single mother with a 4-year-old and an 8-year-old who isn’t working now gets $6,000 annually instead of nothing.
- A married couple with a 3-year-old and a 7-year-old in which one person is earning $20,000 gets $6,600 instead of $2,625.
The current credit also has lower phase-out levels than previously: starting at $75,00 for an individual, $112,500 for a single parent who are heads of households or $150,000 for couples, compared with $200,000 for a single parent and $400,00 for married couples before.
When will the payments start to come in?
Half of the funds will be distributed periodically beginning as early as July. The Internal Revenue Service could send the checks as frequently as monthly, but it has not yet defined exactly what the frequency will be.
The other half of the funds will come in the form of a refund with parents’ 2022 taxes.
This change is one of the most significant in the law. The credit had previously been distributed annually, and the move to periodical funds will help low-wage families who need the money in the short term. It also means the funds will be more visible to those who receive them, something advocates hope will help drum up support for making the change permanent.
Eligible families can also opt to forgo the periodic payments and receive them in one lump sum with their taxes instead.
When funds will start going out is still unclear. The tax filing date has been pushed back from April 15 to May 17 because of the pandemic, and the IRS expects to be busier later into the year processing income taxes. The same teams who do that work would also work on the child tax credit and a portal that is being developed to allow filers to update their status, or choose to move to annual tax credit payments. The IRS has warned that those changes may delay the checks getting out by mid-summer.
“It might be a challenge to get into monthly right out of the box,” IRS Commissioner Charles Rettig told lawmakers in March, adding that the agency has “one month less to do the development,” on the portal, as well.
What happens if the credit is not expanded further?
If Congress does not act to expand the credit beyond the one-year extension in the American Rescue Plan, the credit will still be available but under its pre-2021 parameters. The funds will be reduced to a maximum of $2,000, regardless of a child’s age, and will again be available in only annual distributions.
The credit will also stop being “refundable,” meaning it will no longer be available to families who pay nothing in taxes each year. The families of 27 million children who gained access to the credit through the American Rescue Plan expansion will no longer be able to access it once the expansion expires.
Who are the key people behind the expansion?
Since 2003, Connecticut Democratic Rep. Rosa DeLauro has been pushing at every opportunity for the extension of the credit, with much of her focus on ensuring the credit reaches the lowest income families.
Two decades ago, there was “no national debate about it — absolutely none,” DeLauro said. The tide began to turn when members on both sides of the aisle started to consider the idea, and research emerged showing the immense potential a child tax credit expansion could have on reducing child poverty.
While new to the United States, the idea of curtailing child poverty — in some cases, by as much as in half — through direct payments isn’t new around the world. In 1999, the U.K. began to do just that and a decade later, child poverty had dropped by almost half.
The U.S., meanwhile, has one of the highest child poverty rates among developed countries.
DeLauro’s plan, which she has introduced in Congress about a dozen times, was ultimately included in almost its entirety in the American Rescue Plan. The key distinction is that in her proposal, it would be a permanent change.
Since the passage of the package, which DeLauro called a “remarkable day,” she has turned her attention to pushing for permanence.
“Whatever we need to do, we start today — as soon as the bill is signed,” she said earlier this month. “I’ll be happy to take on that fight.”
She has the support of most Democrats in both chambers, and her bill is cosponsored by Rep. Suzan DelBene and Sens. Sherrod Brown and Michael Bennet, all of whom have also been longtime advocates for the child tax credit expansion.
What are other suggestions for changing the child tax credit?
Republican Sens. Marco Rubio and Mike Lee, who have supported expanding the child tax credit to as much as $4,500 for young children, said they don’t support making it fully refundable to the lowest-wage families.
“That is not tax relief for working parents; it is welfare assistance,” Rubio and Lee wrote in a joint statement earlier this year in response to a plan put forth by Sen. Mitt Romney. “An essential part of being pro-family is being pro-work.”
Romney, a Republican, has also supported an expansion of the child tax credit but has proposed a different method to pay for the change in the long term.
Romney’s proposal would expand the credit to $4,200 a year for children under 6 and $3,000 for those ages 6 to 17. The payments would also be monthly and fully refundable, but to pay for it, Romney proposes eliminating other parts of the social safety net, including Temporary Assistance for Needy Families (TANF), and eliminating the state and local tax deduction, which benefits high-income households disproportionately.
Romney’s plan would also distribute the money through the Social Security Administration instead of the IRS.
What happens next?
On March 26, 41 Democratic senators sent a letter to Biden urging him to make the credit permanent.
The early details of the president’s upcoming infrastructure plan indicate he plans to expand the credit — but only through 2025.
“We must not allow these critical expansions to expire after one year. Doing so would result in a significant spike in child poverty, after we have made historic strides to end it. It would mean that millions of struggling adult workers would once again be taxed into poverty,” the senators wrote.
There is also the potential for Romney’s plan to reenter the conversation as discussions of a permanent child tax credit expansion continue.
In a split Congress, Republicans could have some influence, said Samuel Hammond, the director of poverty and welfare policy at the Niskanen Center, a think tank that helped craft past iterations of the child tax credit expansion, including Romney’s plan.
“A year from now when it’s up for renewal, it’ll be really important to have at least some kind of Republican Plan B or base of support for making it permanent and, importantly, having a strategy for paying for it,” Hammond said.