By Andy Nielsen

Congress is currently considering a sizable piece of legislation - the Build Back Better Act. The bill is politically feasible thanks to a wonky federal budget law that allows for budget reconciliation, and would have a transformative effect on individuals, families, and children across the United States. Two provisions that the Indiana Institute for Working Families has been tracking closely are the current expansions to the federal Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). As noted in previous posts (CTC & EITC), these changes are effective for 2021 only, so Congress will need to take action or else these important reforms to our tax code will expire. The good news? The Build Back Better Act steps up to the plate.

CTC:

The Build Back Better Act extends the changes made to the CTC in the American Rescue Plan (ARP) through 2025. This includes increasing the amount of the credit for children in some households and the option to receive part of the credit through advance monthly payments. However, the Build Back Better Act goes even further by making the credit permanently refundable – you can find a refundability primer on an earlier blog post here – allowing low-income families to capture the full value of the credit. This is extraordinary news for families and households who need it the most.

The bill also eliminates the Social Security Number (SSN) requirement for children, allowing children with Individual Tax Identification Numbers (ITINs) to be eligible for the credit. This is not as much a change as it is a reversion to previous law before the enactment of the Tax Cut & Jobs Act, which established a SSN requirement. Approximately 11,000 additionalchildren in Indiana would be eligible for the CTC under this change.

Households have until November 15, 2021 to sign up for advance payments. In September, 2.3 million Hoosier children in 1.3 million households received advance payments.

EITC:

The Build Back Better Act also makes permanent the ARP’s changes to the federal EITC, expanding benefits to childless workers and widening the eligible age range to include younger and older workers. While this is encouraging news, Congress should seriously consider addressing some of the remaining issues such as expanding the credit to all adults, including those with ITINs, and eliminating the marriage penalty.

Outlook / Next Steps:

Last week, the House Committee on the Budget combined the various components of the Build Back Better Act into one single piece of legislation and reported the bill out of committee. This incorporated CTC and EITC expansions included in the House Ways & Means Committee (discussed above). What is next is far from certain. Larger debates on avoiding a government shutdown, bipartisan infrastructure legislation, emergency funding to address the damage from Hurricane Ida, and raising or suspending the debt ceiling complicate the future of the Build Back Better Act. However, federal lawmakers have a duty to clear the deck and deliver, especially when it comes to public policy that will have a meaningful impact on people’s lives.  

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.

By Andy Nielsen

In a legislative session dominated by the biennial budget and pandemic response, Indiana lawmakers took an important step to strengthen our state’s social safety net for many Hoosiers across the state. House Enrolled Act 1009 increased the state’s Earned Income Tax Credit (EITC) from nine percent to ten percent of a taxpayer’s federal EITC, which had been largely untouched since 2011. Many thanks to our lawmakers for recognizing the effectiveness of this tried and true tool to help combat poverty in Indiana.

The federal EITC was created in 1975 as a tool to incentivize work, boost earnings, and combat poverty. Eligibility and the amount of the credit are a function of a taxpayer’s earned income, filing status, and the number and age of children claimed on the tax return. Simply put: the more you (and/or your spouse) work, the higher the credit, and once you earn a certain amount, the credit begins to phase out. Have kids? Then you may receive a larger credit.

The federal credit phases out at a higher income for married couples filing jointly compared to individuals filing single or head of household. However, the maximum credit is determined by the number of children (under age 19 or 24 if full-time student and must have a valid SSN) claimed on the return and whether or not the filer is single or married. The table below illustrates these differences. Income ranges provide the minimum earned income to receive the maximum EITC and the maximum amount where credit is zero (completely phased out).

The federal EITC has been extremely effective at combating poverty and is quite popular. In 2018, the credit lifted approximately 5.6 million people out of poverty – including about three million children. Data from the Internal Revenue Service (IRS) for tax year 2019 demonstrates the credit’s popularity with about 25 million individuals and families nationwide receiving an average EITC of around $2,461, including 515,000 Hoosiers with an average credit of $2,424. Unfortunately, only 78% of eligible taxpayers (79.8% in Indiana) claimed the federal tax credit in 2017. To put this in perspective, nearly 135,000 additional Hoosiers were eligible but did not claim the credit – that’s over $324 million gone unclaimed.[1]

One of the more important features of the credit is that it is fully refundable, meaning the "unused" portion of the credit is recouped through a refund at tax time. A quick refresher on tax credits. Unlike tax deductions that lower taxable income, tax credits offset tax liability dollar-for-dollar. Say you owe $2,000 in taxes and have a $2,400 credit. If the credit is refundable, your tax liability is reduced to $0 and you receive the remaining $400 of the credit as a refund on your return. If the credit is non-refundable, the remaining $400 is left on the table. Refundability ensures the credit is fully realized by low-income taxpayers who may reduce their tax liability to zero through other credits or deductions.

In 1999, Indiana followed the federal government’s lead by creating its own EITC. While the credit was modified several times and remains decoupled (stay tuned for future blog post) from its federal counterpart, the state credit is still an important tool for Hoosiers. Like the federal EITC, Indiana’s credit is fully refundable, making it among the most effective and targeted tax reduction strategies to help offset regressive state taxes. According to an analysis provided by the Institute on Taxation and Economic Policy (ITEP), recent changes (effective tax year 2022) made to Indiana’s EITC in the 2021 Legislative Session will provide a tax cut to 13 percent of Hoosiers (see table below). Again, this is an important change and a moment to celebrate the legislature’s efforts towards a stronger social safety net, but we need to keep up the momentum.

Looking ahead, Indiana needs to focus even further on using the tax code to strengthen Hoosier households and families. Given the substantial changes made to the federal EITC, Indiana lawmakers should create parity between the federal and state credits, which would be a critical step towards further improving the livelihoods of our most vulnerable fellow Hoosiers.