Nuts and Bolts of the 2021 Advanced, Enhanced Child Tax Credit
173 Tax Notes 319 (Oct. 18, 2021)
8 Pages Posted: 18 Nov 2021
Date Written: October 17, 2021
The enhancements in the child tax credit (CTC) in the American Rescue Plan Act of 2021 (ARPA) signed by President Biden on March 11 are a targeted child-centered, economic stimulus. Economists estimate that the 2021 CTC enhancements will increase consumer spending by $27 billion to $37 billion, generate $1.9 billion in state and local sales taxes, and create 511,000 new jobs at the median wage. Similar to the economic stimulus in rural areas from Social Security benefits, the enhanced CTC doubles its pre-ARPA spending power of $14 billion for households in rural America.
Less than four months after enactment starting on July 15, Treasury, through the IRS, is delivering almost 40 million monthly installments of estimated advanced, enhanced child tax credits (AECTC) to households, including 60 million children and their families. The Urban-Brookings Tax Policy Center estimates that 92 percent of families with children will receive an average annual CTC of $4,380 in 2021. The Joint Committee on Taxation has estimated that ARPA CTC enhancements cost $110 billion, while Columbia University based Center on Poverty and Social Policy determined that the benefits should be about eight times the cost at $800 billion. CTC benefits include increases to children’s future earnings, retirement benefits, and tax payments, and decreases in child protection and criminal justice services as well as healthcare costs for children and their families because of better health and longevity.
Economists have estimated that the AECTC will cut childhood poverty by more than 40 percent, lifting more than 4 million children above the poverty threshold. The full refundability aspect of the AECTC dramatically reduces poverty rates for children. Scholars have estimated that without full refundability childhood poverty rates would increase by 53 percent for all children and by 83 percent for Black children using the AECTC as a baseline. Given that children, especially children of color, suffer the highest rate of poverty of all age groups, the cost of childhood poverty is pervasive, pernicious, and long term. The National Academies of Sciences, Engineering, and Medicine have estimated that child poverty costs $800 billion to $1.1 trillion in lost economic output annually. The AECTC is designed to meaningfully mitigate childhood poverty to a greater extent than any other program in the history of the United States.
Systemic and institutional racism in employment, wages, housing, education, healthcare, and wealth securement and retention has caused Black and Latinx children and their families to suffer poverty disproportionately, and they should similarly benefit from these targeted anti-poverty benefits. Nevertheless, white children and their families are by far the greatest beneficiaries of the CTC. Ninety-four percent of all children in rural communities benefit from the AECTC, including almost 50 percent who before ARPA received only partial or no benefits because of low household income. Families in Utah, Idaho, and South Dakota received the highest average monthly AECTC in July of $515, $487, and $477, respectively. Residents in these states are disproportionately white (86, 90, and 84 percent). By comparison, 89 percent of children in metro areas benefit from the AECTC. Residents in the District of Columbia, despite suffering high rates of poverty, received the lowest average payment at only $383. The District has the highest percentage of Black residents when compared with states, and 18.9 percent of D.C.’s children lived in poverty, compared with the national childhood poverty rate of 14.4 percent. The District’s overall poverty rate was 13.5 percent, compared with the national poverty rate of 10.5 percent in 2019 before the pandemic.
Because the AECTC is fully refundable and not contingent on earned income or a tax liability, 27 million more kids qualify for the benefit than under the pre- and post-2021 CTC, which is not fully refundable. While more CTC beneficiaries are white, 50 percent of Latinx and Black children and their families, who were otherwise not qualified in part or completely, will qualify for the AECTC based on full refundability. Early data outcomes of AECTC success are noteworthy given that after only two modest monthly payments averaging $423 nationwide, 3.3 million adults in households with kids reported no longer suffering food insecurity. The drop in food-insecure households ranged from 38 percent to 25 percent, depending on the racial profile. The rate declined most dramatically for Latinx households with children, from 21 percent to 13 percent (38 percent decrease), and white households with children, from 10 percent down to 7 percent (30 percent decrease). Black households with children suffering food insecurity decreased from 20 percent to 15 percent (25 percent decrease). This is consistent with survey results that indicate the most common additional purchases for lower-income households were for food (57 percent) and other household necessities such as utilities (52 percent), clothing (41 percent), school supplies (31 percent), and housing (39 percent).
Full refundability is critical to the CTC’s anti-poverty efforts. Before full refundability and credit increases in ARPA, only 89 percent of families with children qualified for an average CTC of $2,310. The bottom 20 percent of the income distribution received the least from the pre-ARPA CTC. The average CTC was only $75 for single parents and $760 for married couples in this quintile. Before ARPA, about 70 percent of children in single, female-headed households did not receive the full credit, despite higher poverty rates. Given these low-benefit amounts for single parents; increasing out-of-pocket costs of $400 on average for using paid preparers; and the burdens of time, effort, transportation, and other resources, the bottom quintile had the lowest CTC participation rate at only 3 percent. By comparison, married couples in the top 40 percent and 20 percent of income households received average payments of $3,950 and $3,580, respectively. Roughly three-fourths of ARPA CTC benefits go to families with the lowest incomes.
The AECTC monthly distributions are based on a family’s income tax return filings for 2020 and 2019 or information provided through the IRS’s nonfiler portals. Families must reconcile their AECTC with the actual amount of their CTC when they file their 2021 tax returns in 2022. Notably, there are two adjusted gross income (AGI) phaseouts and one payback safe harbor. These complexities not only make the calculations technically complicated but have caused some tax professionals to suggest that taxpayers opt out of the AECTC. Obviously, this determination depends on the taxpayer’s facts and circumstances for the tax year on which the AECTC is estimated and the 2021 tax year. However, based on Census Bureau demographic data, it seems that most families with children should not opt out.
This article presents myriad fact patterns to shine a light on possible issues. The most significant contribution we would like to make is to ensure lower-income families, who have been targeted to secure this credit for their financial well-being, especially for their children, do not opt out and lose advanced, monthly payments that many of these families need to put food on their tables. Moreover, advocates should rest assured that Congress designed a safe harbor to give these families a benefit that will not have to be paid back if life circumstances change.
Keywords: tax policy, Child Tax Credit, antipoverty relief, childhood poverty, payback protection safe harbor, tax credits, refundable tax credits
JEL Classification: K34, I31, I38, H24, H53
Suggested Citation: Suggested Citation