By Andy Nielsen

A global pandemic can change a lot about our daily lives. And a lot has changed in the past 16 months. While low-income families regularly experience the brunt of the negative effects stemming from economic and public health crises, several federal policy changes from earlier this year will help ensure families have a chance to recover. Believe it or not, these changes come through our tax code.  

Predictably, households with children are more likely to experience difficulty covering basic living expenses – such as rent, food, utilities, clothing, childcare, and transportation – than those without children. Combined with pressures stemming from slow-to-nonexistent wage growth, there is little surprise that low-income families with children struggle to get by. That is why the recent changes to the Child Tax Credit (CTC) will make an immediate and considerable impact on children and families that need it the most.

Earlier this year, Congress passed and the President signed the American Rescue Plan (ARP) that dramatically changed the CTC in several ways. First, the ARP increased the existing $2,000 per child CTC to $3,600 per child under age six and to $3,000 per child age six and over for low-income families. It also made sure that all minor children are actually eligible by increasing the maximum age of dependent children from 16 to 17-years-old. However, the two most important features of the credit may very well be that (1) the CTC is now fully refundable and (2) the credit can be received through advance monthly payments.

Refundability:

We discussed in a previous post about the importance of refundable tax credits, especially for low-income families. Prior to the ARP, low-income families would not capture the full value of the credit because it only covered their remaining tax liability after other credits and deductions. Those without tax liability or a filing requirement received nothing at all. So, while the maximum possible CTC per child was the same for all earners (below a certain income threshold), non-refundability meant that the tax credit was subsidizing more child rearing costs for higher-income versus lower-income taxpayers, making the effective tax credit much smaller for families that needed it most. A fully refundable credit closes that discrepancy for low-income and no-filer households.

Advance Payments:

The advance monthly payment option is a welcome feature that will go a long way in helping families meet their basic needs. Starting July 15, 2021, the Internal Revenue Service (IRS) will begin providing half of a family’s total CTC (for all eligible children) through advance monthly payments. Families will claim the second half of their total CTC when they file their 2021 tax returns.

Families that are not required to file a 2020 tax return or don’t plan to, can sign up to receive their advance payments through the IRS’ Child Tax Credit Non-filer Sign-up Tool. This non-filer tool is especially important for Indiana given an estimated 41,000 Hoosier children live in households that may not have filed a 2019 or 2020 tax return.

These advance monthly payments are estimates of a family’s total eligibility for the CTC using the most recent data on file with the IRS. So if a family’s income has substantially changed in 2021, they should use the IRS’ Child Tax Credit Update Portal to update their income. This is important as families that approach the threshold where the CTC begins to phase out may be at risk of overpayment. However, this risk is substantially hedged as, again, only half of a family’s estimated CTC can be redeemed through advance payments, and families can opt out of the payments using the Non-Filer Tool. It is also important to note that this is a tax credit and not income, so advance payments will not affect a family’s eligibility for other social safety net programs like Medicaid, Supplemental Nutrition Assistance Program (SNAP) benefits, or Supplemental Security Income (SSI). 

The impact of these changes on Hoosier families will be astounding. Approximately, 558,000 additional children will now benefit from the tax credit. A majority of these children – 323,000 – live in rural areas of our state. These changes will reduce child poverty by 43%, lifting 78,000 Hoosier children out of poverty. Statewide, 1.45 million children (92%) will now benefit from the CTC. 

Again, these changes are currently effective for tax year 2021 only, so the need for permanency is already clear. There will undoubtedly be hiccups with this historic change to our social safety net, yet hopefully, it will lead to subsequent policy changes that will promote equity and remedy any issues. For the time being, families need to file their 2020 returns or use the IRS’ Non-Filer Tool to begin receiving their advance payments.