Families Will Receive Thousands More to Support Their Kids: What 'Game-Changing' New Child Tax Credit Means
"Game-changing" and "ground-breaking." That's how the expanded child tax credit — one of the myriad provisions in the $1.9 trillion American Rescue Plan Act signed by President Joe Biden on Thursday — is being hailed by anti-poverty advocates.
The impact of the expanded credit won't be fully felt for months, though some scholars have hypothesized that its implementation could help cut child poverty in half.
The provision will impact more than the most deeply impoverished by putting thousands of dollars into the pockets of many Americans, including those in the middle class.
Here's more about what the expanded child tax credit is and how it will work.
What Is the Child Tax Credit?
The child tax credit isn't new, as Lisa Gennetian, a professor of early learning policy studies at Duke University, explains to PEOPLE. But its expansion is notable in terms of the impact it's likely to have both on families and on overall child poverty.
"The child tax credit has been around for a while," Gennetian says. "But it historically has not been viewed as part of a larger anti-poverty strategy."
A tax credit is an amount that taxpayers can subtract directly from any taxes owed — in other words, it reduces the amount outstanding to the government each year. (When the government calculates that you have overpaid in taxes throughout the year, in part because of credits like this, it issues you a tax refund.)
Traditionally, the child tax credit has provided parents or those with qualified dependent children, who earn at least $2,500 and less than $200,000, with an annual $2,000 credit for each kid under the age of 17.
With the passage of the American Rescue Plan, both that amount and the age limit of eligible children has been increased for 2021. So eligible parents or caregivers of dependent children will now get a $3,600 credit for each child 5 and under and a $3,000 credit for those 6 to 17.
Perhaps the most notable change is that eligible parents and those with dependent children can now also get an advance on half of their 2021 credit in the form of monthly payments of $250 or $300 per child.
Put another way, the households that qualify would be able to receive six months of monthly income (barring possible problems implementing a monthly payment system) and then would receive the rest of the credit via their annual tax refund.
"Before, the credit was timed to the tax system — file your taxes by April 15, the government sends you a check in six-eight weeks, if it owes you something," Gennetian says. "Now, the money can be distributed as monthly advance beginning in July."
Those monthly payments will go to bank accounts from July through December and the remaining funds will be distributed as lump sum payments in 2022, after 2021 taxes are filed.
Who Will Be Eligible for the Credit?
Expansion of the credit means that those who qualify will now get more money. But it's also, as Gennetian says, "changing the pool of people who can get it."
The updates to the child tax credit won't require anyone to make any changes to their 2020 tax return, but it will require that those receiving the credit have filed taxes in 2019 or 2020, as the income on those returns will determine eligibility.
Those who are eligible for the expanded tax credit include: single-filers making up to $75,000 annually, heads of household making $112,500 annually and married couples filing jointly who make $150,000 annually.
After that income cutoff, the expanded credit begins to phase out in increments as income increases. Those making up to $200,000 remain eligible for the original $2,000 credit.
The new legislation also waives a $2,500 earning requirement in the earlier child tax credit, so even parents who aren't employed can benefit. "The biggest thing that happened with the expansion is that you can collect the tax credit as a refund, even if your tax bill is zero," Gennetian says.
Alexandra Cawthorne Gaines, vice president of the Poverty to Prosperity Program at the progressive think tank Center for American Progress, says estimates show that some 93 percent of children across the country will now make their parents eligible for the expanded tax credit.
There's also no limit when it comes to number of children who can benefit.
"If you're a single person making $75,000 and you have multiple kids under the age of 18, you can get the tax credit for each child," Gennetian tells PEOPLE.
For example: A married couple or a single person who meet the income eligibility requirements and have two children ages 5 and 3 would receive $600 per month from July to December and could additionally claim $3,600 as a credit on their 2021 tax return.
Who Supports It?
While the expanded tax credit been hailed as a progressive policy, there has been recent support for similar measures on either side of the aisle.
Republican Sen. Mitt Romney introduced a bill last month that, similarly, would provide families with monthly cash benefits of $250 to $350 per child. That piece of legislation would require eliminating other poverty programs, but it offers a signal of bipartisan support.
"The child tax credit expansion seems to be appealing across partisan lines," Cawthorne Gaines tells PEOPLE. "Both sides of the aisle will likely want to make this permanent once they sense how popular this is and how popular it will be once people get cash in their bank accounts this summer."
What Are the Criticisms of the Credit?
Conservative opposition to the expanded credit comes from how it is funded (or will be in the future) and from those who argue that offering no-strings-attached cash will encourage dependence on the government and therefore won't incentivize low-income or unemployed people to find jobs.
Studies, however, have found that the opposite is true, experts say.
"A common critique is that you'll see a reduction in employment if you give people money, Gennetian says. "Instead, in places where similar measures have been put in place, we see money used to invest and spur some kind of employment and earnings." Gennetian offers up the very modern-day example of an unemployed person using extra cash to buy a sewing machine and open an Etsy shop selling face masks.
There are also moral and philosophical arguments at play — echoing conservative concerns about government support — such as suggesting that giving money to parents would only incentivize irresponsible family planning (more children meaning more money) or allow poor financial decisions.
"There's no evidence for those, either," Gennetian says. "The hope is that the money will be used in reducing the worst-case scenarios from happening: protecting people from getting evicted, not having a place to stay, protecting them from being hungry or keeping the lights on."
Proponents of the measure do have their own issues with the legislation, however. While she notes that the expanded credit "will likely lead to the largest reduction in child poverty in decades," Cawthorne Gaines tells PEOPLE that the credit is essentially just a "down payment" on child poverty. As it stands, even the expanded credit leaves many children out — such as those in the juvenile justice system, in foster care or those whose parents are immigrants in the country illegally.
Cawthorne Gaines also notes that the American Rescue Plan doesn't set aside funds for outreach, meaning there are worries that many people (low-income families who have never done their taxes, for instance) won't necessarily know about the tax credit, or that they qualify for it.
"It's a huge concern," Cawthorne Gaines says, adding that CAP and other organizations are advocating that resources be used to help people file their taxes or at least be made aware of the benefit.
When Will It Roll Out?
The expanded child tax credit is law due to the passage of the American Rescue Plan last week, with monthly advance payments beginning in July.
But keep in mind: The expanded payments and monthly advance payments are only temporary.
Democrats will likely begin to push for a more permanent measure in the coming months and negotiations will likely hinge on the popularity of the program. Some observers say the decision to make the expansion temporary was strategic, in order to build voter support before trying to extend it.
"The hope for proponents of the measure would be that it will be politically difficult to take something away from people that's helping them," Gennetian says. "And it will be hard to prove that its' not working."
How Will It Affect Childhood Poverty?
"Establishing a basic income for every child has long been thought of as a way to protect children from economic recessions and, in particular, from their parents experiencing earnings and job loss through no fault of their own," Gennetian explains, adding that the expanded credit mimics policies already in place in the U.K. and in Canada.
Currently, an estimated 13.6 percent of children under 18 live in poverty. The poverty line, for a family with one child is $21,960 per year.
A study by the Center on Poverty and Social Policy at Columbia University estimates that the expanded child tax credit and other provisions in the American Rescue Plan could drop the number of American children in poverty to 7.5 percent.
In the short-term, the expanded tax credit is likely to help even solidly middle-class Americans, many of whom have left the workforce amid the COVID-19 pandemic in part to take on childcare themselves (extra cash means more money for childcare, and increased work availability).
But the monthly payments could have an even more astounding impact on a family living in poverty and on Black and Latino children.
"The impacts on racial disparities are very dramatic," Cawthorne Gaines says. "This could cut deep poverty in half."
Estimates show that the law will lift 4.1 million additional children above the poverty line (including 1.2 million Black and 1.7 million Latino children) and lift 1.1 million children above half the poverty line (what Cawthorne Gaines meant when she referenced "deep poverty").
In short, she says, it's a "game-changer" for most American families.
"Families that have the youngest children often have the most expenses and are usually younger, earlier in their career, or maybe they had a child they were not expecting to have," Cawthorne Gaines says. "Getting payments every month helps cover their recurring needs: childcare, food."
It also has the added benefit of allowing parents to get back to work or find better opportunities. "Work is not free. You need to have childcare, if you're a parent. You need to have transportation," Cawthorne Gaines says.
There could be longer-term impacts, as well.
"We have seen positive effects dribbling down to children in other types of programs that boost income for low-income families in the U.S.," Gennetian says. "That might mean the kids that benefit now will see increased employment and earnings down the line because of reduced parenting stress, or their parents' ability to buy higher-quality childcare, or enroll them in after-school programs, or move to a safer place."
A 2010 study by researchers at the University of California, Irvine, for instance, found that even a $3,000 increase in annual family income for children under age 5 translated into an estimated 19 percent earnings increase in adulthood.
Gennetian says: "Biden won't see the returns to this. It will be 15-20 years from now, when people fully realize how it affected the children. That's when you'll be able to say, 'America invested in their children, and now look at them.' "