The Child Tax Credit and You

The American Rescue Plan, signed by President Biden in March, includes a lot of things. For many U.S. readers of this blog, perhaps the most notable and salient is that it increased the child tax credit and, starting next month, will send monthly checks for a portion of the credit to taxpayers.

I wrote about the details over on the Surly Subgroup, but wanted to highlight a couple things about it for a specifically Mormon audience. It isn’t, of course, particular to Mormons but, falling birthrates[fn1] notwithstanding, we still tend to have (marginally) more children than the average American. Which means that the child tax credit, and its prepayment, are going to be relevant to many of us.

Of course, to understand what’s going on, we need to answer a couple questions.

What Is a Tax Credit?

Tax credits are basically dollar-for-dollar reductions in a person’s tax liability. So if I owe $4,000 in taxes and get a $1,500 tax credit, I’m actually going to owe $2,500.

There are two types of tax credits: refundable and non-refundable. A non-refundable tax credit is one that will reduce your tax liability to $0 but not lower. So changing the numbers: imagine I owe $3,000 in taxes and have a $3,500 tax credit. In that case, I will owe $0 in taxes.

With a refundable tax credit, by contrast, if the tax credit exceeds the tax liability, the IRS will write you a check (figuratively, anyway: if it has your bank information, it’ll just direct deposit the money). So in the previous example not only do you owe $0 in taxes but the government will send you a check for $500.

What Changes Did Congress Make to the Child Tax Credit

Four big ones:

  1. It increased the age of children eligible for the child tax credit. Previously it applied to children 16 years old and younger as of the end of the year. Now it applies to children 17 years old and younger.
  2. It increased the amount of the tax credit. Previously it was $2,000. Now it is $3,000 (or $3,600 for children 5 and younger).
  3. It made the child tax credit fully refundable. Previously, only up to $1,400 was refundable.
  4. It told the IRS to prepay the child tax credit for the second half of 2021.

(A couple things to note: currently, all of these changes only apply to the 2021 tax year; the amounts revert to their lower levels next year and there will be no advanced payments next year. It’s possible that Congress will extend these changes or even make them permanent, but currently they’re scheduled to go away. Also, some of the benefits phase out at higher income levels.)

So Why Make These Changes?

The quick answer is, these two changes together are projected to reduce child poverty by 50%. Most of that reduction is because parents will have more money. But part of it is that the advance payments will give parents money to pay ongoing expenses; otherwise, they would only get the money the next year, after they filed their tax returns.

Anything I Should Watch Out For?

I go into this in more detail over at Surly but the short answer is, the advance payments will likely reduce your tax refund. Why? Well, even though we file our tax returns for 2021 by April 2022, most of us actually prepay our taxes. We do that through employer withholding. That is, our employers hold back a portion of our salary every paycheck and send that to the IRS. That counts against our ultimate tax liability. If your employer withholds more than you owe, you get a refund when you file your return.

If you take the advanced payments, though, you’re getting a portion of that refund in advance. If you have one child who is older than 5 and your income isn’t too high, you’ll get $250 a month for six months. That’s $1,500 in advance. If your tax refund would have been $2,000 without the advance payments, it will only be $500. (If your refund would have been $1,000, now you’ll owe $500.)

This is a good thing! Economically, it is more valuable to you to have a dollar today than in nine months. So getting a portion of your refund today is an economic benefit, even if it means you’ll have to make a payment sometime in the future.

But it’s also helpful to know, in advance, that your refund will be smaller (or, perhaps, that you’ll owe money) come April. Which, in the end, is the entire reason I’m writing this: in the course of fighting child poverty, I want to make sure people don’t face an unexpected surprise next year.


[fn1] In Utah, anyway; Utah, however, =/= Mormonism

Comments

  1. Bro. B. says:

    Thanks for the heads up, Sam. In this case, come April, ignorance is not bliss.

  2. John Charity Spring says:

    So much of the modern media is against families. Hollywood produces one show after another that attacks the traditional family and makes child rearing appear to be as attractive as a hot dog machine at a truck stop. This has been influential on much of the gullible public. It is about time for an effort like this that recognizes how important families truly are.

  3. Thanks for this, Sam. Folks can opt-out of the advance payments. I did so this morning; personally, I’d rather have a larger refund/owe less come next April, than receive a little monthly money now. Here: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal

  4. Thanks Hunter! I mentioned the opt-out over at Surly but it wasn’t up and running yet. I think it went live today, so I appreciate the link.

  5. JCS has found BBC! I get such a kick out of your posts at W&T, that I’m thrilled you are here. Let the hot dogs and crocs begin!

    On topic, thanks Sam for the breakdown. Now we just need to get it on to the national news or something as I have a feeling a lot of people are going to be pissed come tax return time.

    And thanks Hunter. I just went and did my opt out as I feel the same way.

  6. John Mansfield says:

    Thanks, Prof. Brunson, for sharing your expertise. Years ago I wrote a riff on the Steve Martin routine, “You can be a millionaire and never pay taxes.” I looked at how much a married couple with only straight-forward wage income could earn and not pay federal income tax for various numbers of children. I have mixed feelings about credits such as this: on one hand, we enjoy giving breaks to people you could use them and promoting things we like; an the other hand, paying taxes done right is an act of citizenship, part of a feeling that the country is mine too because I’m helping pay for it. As one how once had six dependent children and now has two, I can say the tax holiday does eventually end. Of course, how people feel about taxes is a separable matter from the mechanics you are telling us about.

    During President Obama’s first term I hazily recall a proposal from a committee headed by VP Biden to allow the then-temporarily doubled child tax credit to expire and revert to its previous level (from $1,000 to $500 I think), and to increase the child care tax deduction. These two types of tax manipulation have different impact on single-parent or double-income families with one or two children compared with dual-parent single-income families with three or more children. Election polling indicated one of those two groups was represented more heavily among those who voted for that administration, and the other group preferred voting for the other candidate.

  7. John Mansfield says:

    I didn’t find my original post, but a reference to it: “The ‘Procreative Mormons Suck the Nation Dry’ Tax Credit.” I wrote that in response to the experience after the birth of my sixth child of having a negative federal tax bill even with an ample middle-class income. With the child tax credit three times what it was then, this most be a common experience now, even for people with three or four children.

  8. Geoff - Aus says:

    It is great that some of you can save your payments to get a combined tax return, but it is obviously designed to give immediate aid to those near the poverty line. Great that it can work for both groups. Anything that can lift people out of poverty is worthy of praise.

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