TAX CREDITS APLENTY: "Lessons from the [Earned Income Tax Credit] show that the 2021 [Child Tax Credit] expansion has the potential to improve both child and parent health as well as educational outcomes for children."(ECONOMICS)

• Author: Wedenoja, Leigh

IN EARLY JUNE, many families received a letter from the IRS staring that they are eligible to receive advanced payments of the Child Tax Credit (CTC) as part of the American Rescue Plan (ARP) Act of 2021 signed in March. By July 15, as many as 39,000,000 families had begun to receive direct monthly cash payments through the expansion of CTC. These monthly payments are temporary and the results of some small but critical adjustments to CTC that previously mostly had benefited middle- and high-income families through reducing their tax burden.

The payments are available for individuals earning up to $75,000 adjusted gross income (AGI), heads of households earning $112,500, and couples earning up to $150,000 AGI, much like other COVID-19 stimulus payments. This expansion increases the total amount of CTC for most families, makes CTC fully refundable, and pays half the value in estimated advanced monthly payments.

The ARP Act substantially increased aid to states, local governments, and individuals who had been hit hard by the COVID-19 pandemic. It contained provisions for direct aid, including stimulus payments to individuals, as well as funding for COVID-19 treatment, testing, and vaccination. The Act also substantially enhanced government aid to families by expanding two different tax credits: the Earned Income Tax Credit (EITC) and the Child Tax Credit. EITC generally is available to low-income families and is fully refundable so families that do not owe taxes receive cash payments from EITC. CTC, in comparison, is only partially refundable, so it primarily affects middle- and upper-income families who owe taxes by reducing their tax burden.

The expansion of CTC in the ARP Act makes it behave more like EITC. For 2021, it will be fully refundable, so low-income families (in addition to middle- and higher-income families) will receive cash payments. Further, the ARP Act includes a provision for monthly payments rather than a once per year payment or decrease in tax liability at tax time.

Beginning in July, families began receiving monthly payments up to $250 for each child age six to 17 and $300 for each child under six. This increase represents a total expansion from $2,000 per child to $3,000 per child six and older and $3,600 for children under six. The new credit not only expands the amount of money available to families, it provides half in monthly advanced payments rather than a one-time lump sum.

This expansion of CTC is one of the most-substantial changes to income support for families with children since the expansion of EITC in 1993 and the Personal Responsibility and Work Opportunity Act of 1996, which commonly is referred to as welfare reform. Currently, the changes only will apply for 2021, but a permanent expansion is part of Pres. Joe Biden's proposed American Families Plan.

These three adjustments to CTC--monthly advanced payments, higher payments, and fully refundable status--make CTC function much more like EITC for low-income families and is projected to reduce child poverty by 40%.

The Earned Income Tax Credit is a means-tested social program intended to provide income support to lower-income families with children. The credit is designed to incentivize employment because it is worth less at very low income levels and phases in as families earn more and then phases back out as families approach the maximum-income eligibility threshold. EITC was greatly expanded in 1993 both in terms of the per-child credit amount and the maximum number of qualifying children allowed. There have been a number of other expansions and...