Advance Child Tax Credit Payments: Increasing Support for Families with Children
On July 15, roughly 39 million families with children will begin receiving monthly payments from the expanded Child Tax Credit (CTC), which will continue through December of this year. In March, Congress passed the American Rescue Plan Act, which expanded eligibility for the CTC, increased the amount, and made it fully refundable. This means that eligible families can now receive the full CTC, even if they don’t have earned income or owe any income taxes. The expanded CTC will provide much needed support for our communities as we recover from the hardships of the pandemic. Estimates suggest that, relative to how the program operated previously, the expanded CTC will increase the CTC amount for 65 million children, reduce the level of children living in poverty in the United States from roughly 12.5% of children to 8%, and eliminate large disparities in CTC amounts by income and race/ethnicity.
Importantly, these temporary changes include monthly advance payments of the CTC, so eligible families will receive part of their CTC on a monthly basis (up to $300 per child), beginning July 15, rather than having to wait until after they file their tax returns in spring 2022.
Policymakers have expressed concerns that millions of additional eligible families may not receive the CTC, owing to a lack of bank accounts, permanent addresses, or an obligation to file income tax returns. While many such families were ineligible for the program in the past, that is no longer the case. So it is critical to get the word out about how the expanded program works so as many families as possible can avail of it. The IRS has launched outreach efforts online by providing a new tool families can use to check their eligibility and in local communities by hosting special information sessions. According to IRS estimates, up to 2.3 million children will not receive their CTC payments if families do not have the information they need to access the program. My analysis of the IRS data suggests that more than 160,000 of these children reside in the Seventh Federal Reserve District, many of them in Black, Latinx, and low-income communities. In this blog post, I discuss research findings on the CTC and explain how the expanded program works.
Tax credits as an effective anti-poverty policy
Although the CTC was originally designed as a tax credit for middle- and upper-middle-income families, subsequent changes expanded its eligibility and value to families with lower incomes, and research has highlighted its effectiveness in reducing poverty. A congressionally chartered report issued in 2019 by a National Academy of Sciences (NAS) panel on child poverty concluded that, among major federal assistance programs, the two refundable tax credits—the Earned-Income Tax Credit (EITC) and the refundable portion of the CTC—have been the most successful at reducing the incidence of child poverty. This research further concluded that poverty alleviation can promote child development, both because of the goods and services that parents can buy for their children and because it may create a more responsive, less stressful environment in which more positive parent-child interactions can take place.
Hoynes and Rothstein document that the credits have also led to improvements in infant health, maternal health, children’s cognitive outcomes, and educational attainment. They also document that these tax credits have led to substantial increases in employment for single mothers, with this result concentrated among women with less than a college education and those with more than one child. Brill, Pomerleau, and Seiter argue that one reason the CTC may lead to increases in employment is that it increases the financial returns to work for families with low incomes by reducing their marginal tax rates.
It is important to recognize that the temporary CTC changes would, relative to prior law, increase marginal tax rates families with low incomes pay on their labor income, so the boost to employment may be smaller than what the literature has previously found. According to Brill, Pomerleau, and Seiter, these marginal rates would still remain much lower than they would be if there were no CTC.
Income and racial inequities under prior law
Prior to the temporary change for 2021, most families with children were eligible for the CTC, but benefits were distributed unevenly across income levels and race/ethnicity. Under prior law, 90% of all children were in families that qualified for at least a partial CTC. The credit was progressive, in that it generally provided a larger proportional boost in after-tax income for households with lower incomes than for households with higher incomes. However, in practice, families with lower incomes were less likely to receive the CTC than other families and, when they did receive it, they tended to receive a smaller credit. Indeed, the Congressional Research Service reports that among the poorest families (family income below $10,000 per year) with children, slightly less than half received the credit (47.8%).
As documented by Goldin and Michelmore, these disparities in benefits by income and additional disparities by race/ethnicity were driven primarily by a cap on CTC refunds at $1,400 per child and a limit on the refundable portion of the credit to 15% of the amount by which the taxpayer’s earned income exceeded $2,500. These limitations on refunds, removed for 2021, previously caused the vast majority of children living in households in the bottom decile of the national income distribution to be completely ineligible for the CTC and the majority of filers in the bottom 30% to be eligible only for a partial credit. In contrast, virtually all children living in households in the top half of the income distribution qualified for the full credit amount. Research on CTC data by race/ethnicity finds that approximately three-quarters of White and Asian American children were in families eligible for the full CTC, compared with only about half of Black and Hispanic children (Goldin and Michelmore, Hoynes and Rothstein).
The temporary change for 2021 removes these limitations and as a result, will increase the amount of the credit for taxpayers with low and moderate incomes. Families with higher incomes will generally receive the same benefit as under prior law.
How does the expanded CTC work?
As I mentioned earlier, the IRS and other policymakers have expressed concerns that many eligible households may not benefit as intended from the temporary changes to the CTC, because they may not be aware of how the changes work and have not filed a tax return.
I combined IRS with Census Bureau data to examine the characteristics of zip codes that have a large percentage of children that are CTC-eligible but according to IRS estimates, will not currently receive the CTC because their families have not yet filed a 2019 or 2020 tax return. Here are some results from my analysis.
The share of children who are “eligible-not-registered” in the 1,501 zip codes within the Seventh District ranges from well under 1% to more than 13%. Sixty-one zip codes have an eligible-not-registered share greater than 5%; 390 zip codes have an eligible-not-registered share greater than 3%; and about half have an eligible-not-registered share greater than 2.4%. Of the 61 zip codes with an eligible-not-registered share of greater than 5%:
- 43 (70%) have median family income in the bottom third of the income distribution.
- 30 (49%) have a majority-minority population.
- 7 (11%) have median family income in the top third of the income distribution.
- A child in a zip code with a median family income in the bottom 10% of the income distribution is more than 25% more likely to be eligible-not-registered than a child in any other zip code.
IRS guidance has focused on helping community groups, nonprofits, education organizations, and anyone else with connections to people with children (collectively, “organizations”) to: 1) better understand eligibility for the CTC and advance payments, especially for families that don’t normally file a tax return; 2) be aware of two IRS online tools that help families determine if they qualify for the CTC and, for eligible families who don't normally file tax returns, register for the monthly advance CTC payments, and, if eligible, for Economic Impact Payments and the Recovery Rebate Credit—which can add up to thousands of dollars for a family; and 3) help families avoid scams related to both the advance CTC payments and Economic Impact Payments.
I summarize this guidance here to highlight important features of the expanded CTC. This summary is not intended to cover all details of the program that will be relevant to individual families. Eligible families and interested organizations should rely on official IRS resources for the most accurate, detailed, and up-to-date information on the CTC and the advance payments.
The CTC and advance CTC payments: Amounts and eligibility
Under the temporary changes to the CTC, most children in families with incomes in the bottom decile of the national income distribution are newly eligible for the full CTC. The maximum CTC in 2021 is $3,600 for children under the age of six at the end of 2021 and up to $3,000 per child for children ages six through 17 at the end of 2021. In addition, the credit is fully refundable for 2021. This means that eligible families can get it, even if they don’t have earned income or owe any income taxes.
The new maximum CTC is available to eligible families with a modified adjusted gross income (AGI) of:
- $75,000 or less for singles;
- $112,500 or less for heads of household; and
- $150,000 or less for married couples filing a joint return and qualified widows and widowers.
Above these income thresholds, the extra amount above the original $2,000 credit—either $1,000 or $1,600 per child—is reduced by $50 for every $1,000 increase in AGI.
The advance CTC payments are early payments of 50% of the estimated amount of the CTC that a person may properly claim on their 2021 tax return during the 2022 tax filing season. The payment will be up to $300 per month for each child under age six and up to $250 per month for each child age six through 17. The IRS lists the dates for the advance CTC payments as July 15, August 13, September 15, October 15, November 15, and December 15.
Organizations must determine whether a family has a filed a 2020 or 2019 tax return. And, if so, these monthly payments will be made based on the information contained in that return without the family taking any additional action. If they have not filed, the IRS advises a family to consider whether to file or to use the Non-Filer Tool.
According to the IRS, people without a permanent address can get advance payments of the CTC, Economic Impact Payments or other credits by, for example, listing the address of a friend, relative, or trusted service provider, such as a shelter, drop-in day center, or transitional housing program, on their tax return or in the Non-Filer Tool. Although the IRS can mail checks in the amount of the advance CTC payments, the agency advises that the fastest way to get an advance payments of the CTC is to have it directly deposited into a bank account, prepaid debit card, or mobile app.
Online IRS tools to help determine eligibility and to register for advance CTC payments
The new Child Tax Credit Eligibility Assistant allows a family to determine whether they qualify for the CTC by answering a series of questions about themselves and their family members. The IRS says that using this tool can help a family decide whether they should take the next step and use its new online Non-Filer Tool.
The IRS Non-Filer Tool will allow eligible families who weren’t required to file (and have not filed) a tax return for 2020, to file a simplified tax return, allowing them to register for advance CTC payments. The tool is also designed to help eligible individuals who don't normally file tax returns register for the $1,400 third round of Economic Impact Payments (also known as stimulus checks) and claim the Recovery Rebate Credit for any amount of the first two rounds of Economic Impact Payments they may have missed.
Avoiding scams
The IRS warns families and community partner organizations to be on the lookout for scams related to both advance CTC payments and Economic Impact Payments. The only way to access either of these benefits is by filing a tax return with the IRS or registering online through the Non-filer Tool, exclusively on IRS.gov and at no cost. The IRS encourages people seeking tax advice to visit a low-income taxpayer clinic (LITC).
Conclusion
Research suggests that the CTC has been an effective anti-poverty tool for children. The temporary expansion of the CTC for 2021 has the potential to reduce poverty substantially, as well as reducing racial and income disparities in the CTC’s distribution. However, the program’s success will depend critically on families having the information and access to sign up. In the absence of new legislation, the temporary CTC expansion will expire at the end of 2021, and the program will revert to its old design. It is critical that eligible families receive the information they need to access the expanded CTC in the short term, as any extension of the program beyond 2021 will depend on Congress taking further action.
