Last Updated on May 22, 2023 by Lily Connel
The child tax credit has several advantages, including providing financial support for families with dependent children, reducing child poverty rates, incentivizing work, and streamlining the application process. However, there are potential drawbacks to consider, such as the possibility of contributing to income inequality, fiscal implications for governments, complexity in eligibility criteria, and the risk of creating dependence on government assistance.
Overview of the Child Tax Credit
The Child Tax Credit is a federal tax credit that has been in place since 1997 to provide financial relief to families with dependent children. With the passing of the American Rescue Plan in March 2021, the credit has been expanded to provide even further financial assistance to families affected by the COVID-19 pandemic. The new law mandates an increase in the child tax credit from $2000 to $3600 for children under six years old and $3000 for children between the ages of six and 17 for one year. Additionally, the credit will be fully refundable for one year and families will receive half of the credit in the form of direct monthly payments from July 2021. The expanded credit will benefit more than 90% of families with children under 18, potentially lifting millions of children out of poverty.
While the expanded child tax credit has been praised for its potential to alleviate poverty and provide financial relief to middle-class families, some have raised concerns about its effects on the larger economy. Critics of the legislation argue that it could disincentivize parents from working, effectively creating a new form of welfare. Some conservative lawmakers have proposed alternatives to the expanded credit, such as a credit of up to $4500, but with the caveat that parents must be working to be eligible. These concerns have led some families to consider opting out of the child tax credit payments, particularly if their tax situation has changed, if their tax refund is expected to be smaller, or if they prefer to receive a traditional lump sum for their 2021 tax refund.
How the Child Tax Credit Works
The Tax Credit (CTC) aims to reduce the financial burden on families by providing tax breaks for each qualifying child. Here’s how it works:
- The CTC is a credit for up to $2,000 per qualifying child under age 17.
- The credit is refundable up to $1,400 per child, meaning that even if a family owes no taxes they can still receive a refund.
- To qualify, a child must meet certain criteria, such as being related to the taxpayer, living with them for at least half the year, and being claimed as a dependent on the tax return.
- Income limits apply; for example, the credit begins to phase out for single filers with income over $200,000.
- The Biden administration has increased the CTC for 2021, raising the credit to $3,600 for children under age 6 and $3,000 for children ages 6-17.
- Half of the credit can be claimed on tax returns, while the other half will be paid in monthly installments from July to December 2021.
- The expanded credit is available to more families than before, with income limits raised to $75,000 for single filers and $150,000 for joint filers.
Key Changes in the Child Tax Credit in Recent Years
- Millions of families were eligible for the pandemic-era monthly child tax credit payments of up to $300 per child that expired last December. Now, a new Republican plan proposes restarting the monthly payments to parents, but some families may end up worse off according to an analysis of the plan.
- The Biden administration moved to help middle-income families with an expanded child tax credit included in the $1.9 trillion COVID-19 relief package that passed Congress in March. The American Rescue Plan increased the child tax credit from $2000 to $3600 per child under age six and $3000 per child between the ages of 6 and 17 for one year. The credit will also be 100% refundable for one year.
- Advocates pointed to research that the expanded credit could reduce child poverty in the U.S. by 45% and have called for the credits to be made permanent. However, some Republicans objected to what they said was an expansion of the welfare state that could disincentivize some parents from working.
- Senator Mitt Romney of Utah proposes a plan that would create a new national commitment to American families by modernizing and streamlining antiquated federal policies into a monthly cash benefit. However, this plan would eliminate other assistance for families.
- Under the Republican Senators’ plan, families would receive $350 per month per child up to age 5 for a total of $4200 per year. They would receive $250 per month for children ages 6 through 17 for a total of $3000 per year. The benefits would be limited to up to six children annually and the child tax credit would start to phase out at $200000 in income for single filers and $400000 for joint filers.
Pros of the Child Tax Credit:
The Child Tax Credit has several advantages that can significantly benefit families.
- Increased Financial Support: The Child Tax Credit was expanded in 2021, increasing the amount of financial support provided to families. Families can expect to receive up to $3,600 per child under age six and $3,000 per child between the ages of 6 and 17.
- Direct Payments: Half of the credit will be paid directly to families, starting in July 2021. This means families will receive regular payments instead of waiting until the end of the year to claim the credit on their taxes.
- Reduced Child Poverty: Advocates argue that the expanded credit has the potential to reduce child poverty in the U.S. by 45%. By providing more financial support, families can better provide for their children’s basic needs, such as food, clothing, and shelter.
- Middle-Class Assistance: The new Child Tax Credit provides help to middle-class families that may have experienced financial difficulties due to the pandemic. For example, some parents had to leave their jobs or reduce work hours to care for their children who could not attend school.
- Increased Eligibility: According to the Tax Policy Center, more than 90% of families with children under the age of 18 will receive some benefit from the new law. Single parents with an adjusted gross income of $75,000 or less, and couples with an adjusted gross income of $150,000 or less, may be eligible for the expanded tax credit.
Overall, the Child Tax Credit can provide much-needed financial support to families and help ensure children’s basic needs are met. The direct payments and increased eligibility can also make it easier for families to access this assistance.
Cons of the Child Tax Credit
The child tax credit has been a subject of debate because it has both pros and cons. Here are some cons of the child tax credit that are worth considering:
- Only temporary: The child tax credit is set to expire after 2025. This means that its benefits are only temporary and may not have a lasting impact for families.
- Could incentivize not working: Some Republican politicians argue that an expanded child tax credit could discourage parents from working and create a dependency on government assistance.
- Could increase the national debt: An expanded child tax credit could be costly and increase the national debt, especially if it becomes a permanent fixture.
- Could be unfair to childless households: Providing a benefit only to families with children may be seen as unfair to households without kids.
- Could lead to fraud: Expanding the child tax credit to make it more accessible could lead to fraudulent claims, which could hurt the credibility of the program.
The Child Tax Credit or child allowance has been a topic of debate in the US safety net. The social insurance aspect of protecting children against poverty seems to be the primary argument for the benefit as it yields a positive social return on government spending through increased school performance, child and maternal health outcomes, and better long-term outcomes for children.