What The New Child Tax Credit Would — And Wouldn’t — Do For Families

In 2021, Americans got a brief taste of a wildly audacious and expanded social safety net program. As part of the American Rescue Plan, Congress expanded the child tax credit (CTC) — a long-running program that gave qualifying families a partially refundable tax credit based on their income — into something much bigger and more profound. In that single year, Congress made the credit significantly more generous and fully refundable; allowed parents at even the lowest level of earnings to benefit; and distributed half of the payment in monthly installments to families, the other half at tax time. The credit only lasted a year, and yet, in the year that it existed, it led to a 46% reduction in the child poverty rate. It lifted almost 3 million children out of poverty. Almost as soon as it expired, the child poverty rate in the U.S. doubled.

The current child tax credit is just like the one that existed before 2021: The credit is worth up to $2,000, with $1,600 of it being refundable, per qualifying kid under 17. Families earning less than $2,500 annually do not qualify for the credit.

Various efforts have been made to revive the 2021 tax credit, which was wildly popular and is considered the “gold standard,” to CTC advocates, according to Joe Hughes, a Federal Policy Analyst at the Institute on Taxation and Economic Policy, a non-profit, non-partisan tax policy organization. It’s also popular across party lines: A poll from Zero to Three and Morning Consult found that 85% of respondents want Congress to reinstate the 2021 CTC — 94% of Democrats and 77% of Republicans. But no effort in that direction has yet been successful.

The most recent proposal to revive the CTC — which Congress is trying to do by January 29, the day that tax season begins — would expand the credit in some meaningful ways. It would lift, some estimates suggest, 400,000 children out of poverty. While those changes would be much welcomed, a reinstatement of the 2021 CTC it is not. Joe Hughes talked to Fatherly about what the new CTC proposes — and exactly where it falls short.

What’s in the new bill to expand the child tax credit?

Under the new bill or the new proposal, there’s a change to the way that the credit phases in. It’s actually kind of hard to explain without explaining the current baseline, which is that…

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The credit, under current laws, is not available at all to families with earnings less than $2,500. Even then, it’s only partially available to most low-income families, because the credit phases in when their income is above that $2,500 threshold.

So the families who will see the most impact from this are, of course, families with more children.

The proposal that we have now doesn’t change either one of those things. It does make the credit phase in faster for families with multiple children — by making the credit phase in per child.

That maybe doesn’t sound like much, but it’s actually a pretty big deal. Most kids live in families with multiple children. Under current law, the credit is effectively smaller per child for low-income families with more children.

So the families who will see the most impact from this are, of course, families with more children. Under current law, a married couple with four kids would need over $45,000 in earnings to receive the full credit. This proposal would make it so that they would only need about $33,000.

In 2021, the Child Tax Credit was temporarily expanded to more than $3,000 per child — would this proposal expand the cash amount of the CTC?

The $2,000 credit amount remains. They’re not going back to the $3,000 or $3,600 [credit] for young children. But, there is another limit on the amount that families can receive I didn’t mention earlier — it’s what’s called the refundable portion of the credit and the non-refundable portion of the credit. The non-refundable portion is the $2,000 amount. That’s the maximum credit you can receive, and you can only receive that amount of the credit if it is offsetting some income tax liability that you have.

Now, of course, most low-income families don’t end up with a lot of income tax liability, because of other credits and deductions. So the refundable portion of the credit, which is calculated after the non-refundable portion, is limited currently in 2024 to $1,700. This bill would increase that to $1,900 in 2024, and it would be the full refundable amount in 2025, or the full non-refundable amount, $2,000.

The gold standard for CTC advocates would be a return to the credit that existed in 2021 as part of the pandemic response plan.

I know that’s not exactly straightforward, but it is one of those things where there’s not really a straightforward way to talk about it because Congress has created a very complex calculation. I’ve spent many years now trying to find an easy way to explain this. It’s not really possible.

For middle-income and higher-income families, does this make a significant difference for them or would it?

No. For any family that’s already receiving the full credit, they would not see a change from this.

What are some things about this new child tax credit that you find limiting or inadequate?

The gold standard for CTC advocates would be a return to the credit that existed in 2021 as part of the pandemic response plan. So in 2021, like you mentioned, they increased the credit amount. They made the credit available monthly, rather than as an annual lump sum, and they made it fully available to all families, all low-income families, even those with very low or no earnings.

Obviously, this credit falls pretty far short of that — which I think that most CTC advocates recognized was likely to happen, but it is still upsetting to see that the $2,500 earnings threshold was not reduced to the first dollar of earnings rate. That’s one of the hangups that Republicans and conservatives have had about increasing the credit. They have insisted on maintaining work requirements, but it’s not really a work requirement whatsoever.

What do you mean?

It’s an earnings requirement. You can be working and not receive the full credit or not receive any credit at all. On the other side of that, a family could be not working — they could be sitting on the couch drawing money from a trust fund or from capital gains, and they would be able to receive the full credit because the non-refundable portion of the credit is calculated against all income, not just against your earned income, your wage and salary income.

You also mentioned the credit would become more refundable into 2025. Is that how long the expansion would last? And then we’d have to go back to the drawing board and come up with a new one again?

That is how it looks at the moment. There was a reason that Congress chose 2025 to be the year that these tax provisions would expire. That’s because that’s when many of the provisions of the 2017 Trump tax law expire — 2025. And Congress will be of course looking to extend some of those. Hopefully, they won’t extend all of those tax credits or tax provisions for businesses and for the wealthy, we would hope. But it’ll be a big discussion in 2025.

One thing that will happen already is that the credit amount as it exists right now, $2,000 will be cut in half in 2025. It’ll go down to $1,000 if Congress doesn’t act to change that, which I’m sure will be one of the priorities for Democrats.

Someone who’s looking at this and is saying, "Well, 2025 is in 12 months.” Can you explain the timing of why they’re trying to get this bill passed now and how it could affect the next several years of tax filings?

2025 is coming up quickly. The rules are in effect through 2025 — so it’ll be the taxes that people are filing two years from now in 2026. But still, that doesn’t leave a lot of time. As we have seen with the funding issues in the last several months, Congress really likes to push things off until the last minute.

That’s the harm — there are millions and millions of children and families right now who are not receiving support from these programs that we know are very effective.

What happens if Congress fails, and they don’t expand the CTC?

Well, it was very popular in 2021. It was also very effective in 2021. The CTC, along with other parts of the economic response to the pandemic, actually cut child poverty in half in 2021. When the Census poverty data came out this September, we saw that what happened when all of those things expired at the end of 2021 was that child poverty doubled in 2022, going back to the pre-pandemic level.

That’s the harm — there are millions and millions of children and families right now who are not receiving support from these programs that we know are very effective.

As far as why it wasn’t extended in 2021 or beyond 2021, a lot of it was this fear that parents would either use the credit for trivial things, or even for alcohol and drugs, and that parents wouldn't go back to work, that they would just sit around all day living off of their $3,000 a year. Obviously, all the data that we’ve seen since then says that none of that is true.

All of the labor response studies have found that there was essentially no labor force participation impact from the increased credit, and all of the studies on what families spent the money on shows that they mostly spent it on essentials, housing, utilities, and food.

What do you think about the fact that if this version of the child tax credit becomes law, those monthly payments don’t exist and what replaces it is, as you say, a pretty complicated tax policy that families might not really understand?

Yeah, I think the monthly installments were a really great feature of the 2021 expansion. If you’re worried that families are going to not spend the child tax credit wisely, one of the best things that you can do is ensure that the credit matches their normal monthly household budget, instead of a big lump sum that they get once a year.

Right.

One of the good things in the proposal that we have now is it gives families the option to look back at their income from the previous year — that’s great because a lot of families in the targeted demographic, like the really low-income people who might not be receiving the full credit right now, tend to have fairly unstable income. That can help steady their CTC from year to year.

The issue with that, is, again, it’s another layer of complication. A lot of families might not even know that they have that option. We would hope that the IRS will do that automatically for families because the IRS can see your prior annual income. If they see that the family would’ve received the higher credit, the IRS would be able to automatically adjust that. That is one thing a lot of people have been discussing — ensuring that the IRS is helping families to automatically receive the higher credit that they’re eligible for.

What would be your dream child tax credit?

I think they did it perfectly in 2021. I really can’t think of anything that I would change about that, honestly. It’s a larger credit, for children who are not in school. So childcare costs are going to be higher for children under age 6. It made the credit available monthly. It made it fully available for all families. There was something there for the families, and children who have the most to benefit — those low-income families. But it also the increased credit amount a lot for all families, all middle and even sort of upper-middle-income families.

How likely do you think it is that this child tax credit bill would actually be part of the budget and be passable?

That’s really hard to prognosticate. It looks like it’s probably going to move through the House next week. We’ll need two-thirds of the House in support, but it’s much less clear that it’s going to pass the Senate.