The New Child Tax Credit: Everything You Need to Know
The stimulus checks provided by the American Rescue Plan (ARP) have grabbed all the headlines, but the less-flashy, one-year expansion of the child tax credit is a potential game-changer for most people with kids in the house.
Sure, like much of the tax code, the new tax credit for 2021 is shrouded in bureaucratic technobabble such as “refundable credit” and “modified adjusted gross income.” But experts who’ve analyzed the measure are using words like “dramatic” and “transformative” to describe the impact it will have on most American families—especially if the temporary pandemic relief measure is made permanent, as some lawmakers are lobbying for. And as early as July, the credit will make itself felt in most households with children in a way that everyone understands: money in the bank.
While the child tax credit has existed in some form since the 1990s, the latest changes are so significant that some scholars as well as critics of the expansion are calling it a step toward universal basic income, a controversial public policy approach where the government provides citizens with money—a subsistence—whether they need it or not in order to reduce poverty and inequality. The new credit resembles some key features of so-called UBI, with unrestricted cash going to a broad swath of the population on a monthly basis.
In fact, 90% of all children in the U.S.—65.7 million—will benefit from the expansion, according to the Center for Budget and Policy Priorities, a nonpartisan research institute that predicts the expansion could lead to “historic” reductions of child poverty because earning money is no longer a prerequisite to getting the credit.
So what does it all mean, and when and how will it impact you? We decipher it all here, answering your most important questions.
What is a tax credit, anyway?
Simply put, a tax credit is money that is subtracted from taxes you owe. In other words, the government will pay you back some of the money it took out of your paycheck over the course of the year, or put it toward taxes you owe. A tax credit differs from a deduction, which subtracts from the amount of your taxable income. (All things being equal, a tax credit is the better of the two for your bottom line, tax experts say.)
How much is the new child tax credit?
The most obvious difference between the new child tax credit and the previous one is the size: The new credit is as much as $3,600 for children under 6 and $3,000 for those aged 6 to 17, whereas the 2020 credit provided a maximum of $2,000 no matter the age, as long as the child wasn’t older than 16. The increase is substantial, especially since as recently as 2017 the credit was only $1,000. The average credit per tax filer (whether that be a couple or an individual) is estimated to be $4,380, according to the Urban Brookings Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.
Who is eligible for it?
That’s another major difference. In addition to now including people with 17-year-olds, the new credit also applies to an estimated 27 million children whose parents couldn’t previously claim the full tax credit (or in some cases any tax credit) because their income was too low.
Why? Because the new credit is “fully refundable” rather than “partially refundable.” What this means in plain English is that families can now claim the full amount of the tax credit even if they don’t have enough taxable income to warrant receiving the entire amount as an offset to those taxes. In other words, no matter how little they make, they’ll get the full amount.
By comparison, under the 2020 rules, families couldn’t get more than $1,400 of the $2,000 credit if they didn’t make enough to warrant the full amount, and if their income was really low, they might not be eligible for anything. The way the math shook out, a single filer with one qualifying child would have to earn $24,350 to receive the entire $2,000 credit, according to one analysis.
The extra $1,000 to $1,600 will go to individual tax filers making up to $75,000 a year, married couples making up to $150,000, and heads of household making up to $112,500. For incomes above those thresholds, the extra amount is reduced on a scale but never falls below $2,000 unless someone’s income is more than $200,000 (or more than $400,000 for married couples.)
These are the same limits used in the 2020 rules, so higher-income households will get no less than they did under the 2020 rules. And just as before, those who earn more than $200,000 (or couples who earn more than $400,000) will get less than $2,000 per child, with each $1,000 of income above those thresholds reducing the credit amount by $50. That means for someone with one child, there’s no credit for those with income of $240,000 or more (or for married couples, $440,000 or more).
As an example, let’s take a head of household with a 2-year-old. Here’s how their credit would vary depending on their income:
- Up to $112,500: $3,600
- Between $112,501 and $144,499: $2,001 to $3,599, depending on income
- Between $144,500 and $200,000: $2,000
- Between $200,001 and $239,999: $1 to $1,999, depending on income
- $240,000 and over: No credit
How will the money come to me?
Again, this is another major difference. Unlike the $2,000 credit, the new one will be distributed throughout the year, starting as early as July, lawmakers say. This means people will receive monthly payments of $250 to $300 per child (assuming they’re receiving the full amount) for the second half of this year, with the remainder available next year at tax time, as has traditionally been the case.
The IRS plans to begin delivering monthly payments by July, IRS Commissioner Chuck Rettig told lawmakers in testimony on April 13. The agency will set up a “user-friendly” portal for people to claim the credit, Rettig said.
How long will the changes last?
The changes will only apply to 2021, unless they are extended. Democratic lawmakers, buoyed by their new majority in the Senate as well as a Democratic president, are determined to make the changes permanent, but Republicans oppose even the one-year expansion, saying it encourages people not to work.
“The new CTC and other provisions in ARP fail to learn from lessons of the past, are not targeted to pandemic relief, and risk the loss of billions of taxpayer dollars in fraudulent and improper payments,” Republican Reps. Kevin Brady of Texas and Mike Kelly of Pennsylvania wrote in a letter to the White House on April 11.
What impact will this expanded credit have?
The effects of the new credit will be far-reaching, researchers say.
It’s estimated to reduce the child poverty rate from 13.6% to 7.5%—a 45% reduction—with the biggest beneficiaries being Native American, Black and Hispanic families, according to a Columbia University analysis of a 2019 proposal just like the final version in the American Rescue Plan.
And the impact could be almost immediate. The advance portion—only the portion delivered as monthly payments in 2021—would by itself reduce the child poverty rate to 11.3%, according to an analysis by the Urban Institute, and when combined with other portions of the rescue plan, knock it down to 6.5%.
The new credit will deliver more cash support to low-income children than any other federal program, according to the Urban Brookings Tax Policy Center.
“The significance of this moment in U.S. social policy is hard to overstate,” researchers at Brookings wrote in a March commentary about the relief bill.
How did the child tax credit come about in the first place?
The child tax credit started out as a tax break for middle and upper-income families and has now morphed into a benefit that is meant to reach the poorest of the poor, whether they have any income or not. To understand how and why that happened, it’s helpful to review the history of welfare in the U.S. and the controversy over whether government aid should come with a requirement to work.
Before the child tax credit was established, there was Aid to Families with Dependent Children (AFDC), a New Deal program that gave cash to families with children in need because one parent was absent, incapacitated, dead, or unemployed. Critics of the program said it discouraged work while promoting unwed parenthood and what they called “welfare dependency,” according to the Congressional Research Service.
In 1992, Democratic presidential candidate Bill Clinton ran on a pledge to “end welfare as we know it,” a promise he fulfilled in 1996 when he signed a welfare reform bill into law, with Republican support, that replaced the AFDC with programs that included work requirements and time limits.
The first child tax credit was established as part of the Taxpayer Relief Act of 1997 and offered $500 per child to provide tax relief to upper and middle-income families. Over the years it was expanded to become more generous and to apply to lower-income families as well. The American Rescue Plan transforms the credit into something resembling the “child allowance” that many governments in other wealthy countries already provide.
It is not lost on conservative critics that the newest incarnation of the credit, if made permanent, would reverse the Clinton-era welfare reforms that imposed work requirements for families to receive cash assistance.
“The return to unconditional cash aid would undermine work and marriage in low-income communities and make it more difficult for children in those communities to climb the ladder of upward social mobility,” the Heritage Foundation, a conservative think tank, wrote in a commentary shortly after the American Rescue Plan was enacted.