Bloomberg Tax
Oct. 20, 2022, 8:45 AM

The Child Tax Credit Needs to Be Revived to Fight Child Poverty

Sabrina James
Sabrina James

Last March, the White House cited experts who concluded child poverty hit record lows in 2021 due to the expansion of the advanced monthly Child Tax Credit payments from the American Rescue Plan Act. However, child poverty in the US is still relatively high. The Center of Poverty & Social Policy at Columbia University found that child poverty rates increased significantly in January 2022 when the CTC payments expired. The monthly child poverty rate increased to 17% from 12.1% the previous month. Researchers estimate that 3.7 million more children are experiencing poverty since the advanced CTC monthly payments have been discontinued.

Thanks to new research data, lawmakers may consider using the CTC as a driving force to lessen the number of children suffering from poverty. The original intent of the credit was not to reduce child poverty in America. It is imperative to understand its purpose and how its goals have evolved over the course of decades.

The CTC originated from the Taxpayer Relief Act of 1997. It started at $400 per qualifying child and was a nonrefundable tax credit. Nonrefundable tax credits reduce the taxpayer(s)’ tax liability and aren’t issued as a tax refund. The Economic Policy Institute stated that the purpose of Congress creating the CTC was to minimize the tax burden of families having more children. It gained momentum and was widely supported by both Democrats and Republicans, which led to an increase of $1,000 per qualifying child of age 16 and under in 2001 initiated by the Bush administration’s tax policy.

Many low-income or child poverty-stricken families fell under the required income threshold to file a tax return. In most cases, if these families chose to file an income tax return, it resulted in zero tax liability, and they did not benefit from the CTC. After several years of adjusting the tax laws, the 2017 Tax Cuts and Jobs Act increased the credit from $1,000 to $2,000 per qualifying child. The requirements for claiming the credit also evolved and allowed middle-income families to take advantage of it. The CTC begins to phase out at adjusted gross income of $75,000 for single taxpayers and $110,000 for married couples, limiting the CTC eligibility to middle and low-income families.

The Tax Cuts and Jobs Act also made the CTC partially refundable. If the credit amount exceeded tax liability, taxpayers could receive up to $1,400 as a refundable credit. Several low-income families benefited from the changes to the credit and received a refund. However, the poverty rates did not change for many children living in the US. Some families didn’t benefit due to the credit amount not exceeding their tax liability; therefore, the partially refundable amount didn’t apply.

In 2021, the Biden administration signed the American Rescue Plan Act. According to the IRS, the new law increased the CTC to $3,000 from $2,000 per qualifying child from ages 6 to 17 and $3,600 per qualifying child under age 6. The expansion allowed families to receive half of the “fully” refundable estimated credit in advance over a period of six months. For the first time, the CTC included age 17 and became fully refundable, and advanced monthly payments were issued from July to December 2021. The monthly advanced payments were $250 per qualifying child ages 6 to 17 and $300 per qualified child under age 6. The taxpayers qualified based on their income and the number of dependents reported on their 2019 or 2020 taxes.

The American Rescue Plan had a different purpose for expanding the CTC compared to its origin in 1997, when Congress’ intent was just to reduce tax liabilities for families having more children. The Center for American Progress stated that “the expanded CTC was not just an anti-poverty program; it was also a middle-class stabilization tool, and it aided families regardless of income, race/ethnicity, or education.” Millions of families suffering from poverty received these monthly cash payments as of direct result of the CTC expansion.

Researchers at the Columbia University Center on Poverty and Social Policy noticed a steep decline in child poverty rates as the CTC payments were issued. The third CTC payment kept 3.4 million children out of poverty in September 2021. They estimated 3.7 million children escaped poverty after the sixth payment was issued in December 2021. They concluded overall child poverty was reduced by 30% in 2021.

The CTC advance payments put money into the hands of families who needed it the most. Nine out of 10 low-income families used their CTC payments to purchase life-essential items like diapers, menstrual products, food, rent, transportation, utilities, education, and childcare expenses as parents went back to work. Due to the pandemic, many courts temporarily prohibited landlords from evicting tenants and utility companies from discontinuing services for people directly affected by Covid-19. Many of these temporary orders expired in mid-August 2021, and some families were forced to pay back several months’ rent and utilities or face eviction. The timing of the CTC payments with a predictable monthly schedule helped alleviate some of the hardship and reduced child poverty.

Lawmakers have the research data that shows child poverty hitting its lowest records in 2021 was a direct result of expanding the CTC (increased amount, fully refundable, and monthly payments). This expansion grants access to predictable monthly payments for life-essential goods and services to low-income and child poverty-stricken families. The CTC’s purpose has shifted over the course of decades, but allowing its expansion to expire has led to a spike in child poverty. Lawmakers should consider using CTC in the future as a tool to combat child poverty in America.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sabrina James is the owner of accounting firm AccounTAXstic and a licensed tax preparer with over 10 years of accounting experience.

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