Everything You Need to Know About the 2021 Child Tax Credit

The kids might be alright. Photo: Susan Montoya Bryan/AP/Shutterstock

For America’s childless, the season of “stimmies” has passed. But Uncle Sam’s still got a few checks up his sleeve for those who spent the past year enduring the nightmare of day-care-less parenthood (and/or, are about to bring a new life into this brave new, post-pandemic world).

On Thursday, the vast majority of America’s parents received their first monthly payments from the government, courtesy of the American Rescue Plan’s advance child tax credit (CTC). Here’s a rundown of what that policy does, who qualifies for the benefit, how families can ensure they get the most out of the program, and why the new-and-improved child tax credit might not be long for this Earth.

How the 2021 child tax credit is different from the old one.

The 2021 CTC differs from the 2020 version in three critical respects: It’s larger, fully refundable, includes 17-year-olds, and is available in monthly installments (or at least, half of it is).

With the old CTC, parents were eligible for a maximum credit of $2,000 per kid under the age of 17. With the new CTC, the maximum is $3,000 for kids from ages 6 to 17, and $3,600 for those 5 and under. Note: These rules refer to the age of a child on December 31, 2021. So, if your kid is 5 now, but will turn 6 by year’s end, that tyke will nab you a maximum of three grand. On the other hand, if your child hasn’t been born yet — but is scheduled to enter the world before 2022 — you qualify for the full $3,600 (unless you have a high income; more on that in a moment).

For parents who aren’t poised to earn much money this year (and/or, anyone who cares about reducing child hunger), the most important change to the child tax credit is this: The poorest families in America are now eligible for its full benefit. Which is to say: The CTC is now “fully refundable,” meaning that it is less of a tax credit than a cash benefit, which reduces the tax burden of middle-class families, and provides a de facto social-welfare payment to those who earn too little to owe any taxes.

The CTC is intended to be, among other things, an anti-child-poverty policy. But until this year, it was an anti-child-poverty policy that deliberately excluded the neediest kids in the country. Parents who reported less than $3,000 in income received little to no benefit. The theory behind this design was that it would nudge layabout parents into the workforce, thereby reducing the family’s poverty in the long run. But there are a few problems with that idea. For one thing, there just isn’t much evidence that giving poor parents unconditional cash assistance discourages them from working. Almost all developed countries — from Great Britain to Sweden to Germany to Canada — provide child allowances to all parents, no matter their income status. And those nations do not see significantly lower prime-age labor-force participation than the U.S. does.

More fundamentally though, the child tax credit is meant to help children. For obvious reasons, it is not possible for the government to provide for 2-year-olds by directly sending them $300 a month. Thus, as with the severely disabled, aid to children must pass through the intermediary of their caretaker(s). We don’t withhold aid to the disabled because their caretakers are unemployed. Nor does anyone argue that we should, since the caretaker’s employment status has no bearing on the neediness of the disabled person. Similarly, the fact that a parent is not earning income — whether because she is in school or unwell or simply unmotivated — does not change the fact that their child needs food, shelter, and clothing. There are extreme instances in which a pathological parent will spend income meant for their children on narcotics or other ill-advised indulgences. But that is a very rare circumstance, which can be dealt with by social services.

We know that in the overwhelming majority of cases, giving extremely low-income parents unconditional cash assistance improves the wellbeing of their children: Last year, Congress provided all non-rich households with direct cash payments through the CARES Act, and this aided the poor so much, America’s poverty rate actually fell in the middle of a pandemic and brutal recession. The 2021 child tax credit is projected to cut child poverty by as much as 40 percent.  What’s more, a wealth of studies have demonstrated that giving cash support to low-income parents tends to improve their children’s health, test scores, earnings, compliance with the law, and rates of employment as adults.

End rant. Sorry for the digression — just really not a fan of kids going hungry!

Anyhow, the final major change to the child tax credit is that, for the final six months of this year, the tax credit will be available in monthly installments. Combined with its full refundability, this feature makes the 2021 CTC into a kind of child-allowance pilot program. For many working families, getting $3,000 per kid in a lump sum from the government next spring just isn’t as useful as getting $250 a month starting now (the landlord won’t be waiting until next April to collect the rent, after all). And even for more affluent families, waiting to claim that money on your taxes can amount to making a zero-interest loan to Uncle Sam.

If you qualify for the full CTC — and don’t proactively choose to receive your credit next year — then you should receive a $250 check for every kid you have between 6 and 17, and a $300 one for every little one under 6 on the following dates: July 15, August 13, September 15, October 15, November 15, and December 15.

The second half of the CTC cannot be claimed as a monthly allowance. Instead, it will be doled out as a lump sum when Americans file their taxes, barring a change in existing law.

Who qualifies for the enhanced child tax credit?

We already noted that the very poor are now eligible for the full CTC. But there are some income restrictions on the benefit for the more well-to-do. For most single parents, the maximum income one can make and still qualify for the full child benefit is $112,500; for married families who file taxes jointly, that cap is $150,000.

But that doesn’t mean that Americans earning more than that get zilch. The benefit phases out gradually, declining by $50 for every $1,000 of income one earns above those thresholds. Which means that, for a married couple with two kids to receive $0 from the CTC, they would need to earn $480,000 or more.

The other key requirement is that you need to have provided at least half of your child’s support in 2021, and the child must have lived with you for at least half the year (though there are a few rare exceptions to this rule). Finally, if you share custody of a child, only one parent can claim the credit.

How do you collect the child tax credit if you didn’t file a 2020 or 2019 tax return?

If you filed a 2019 or 2020 tax return — and your number of children has not changed since your last correspondence with the IRS — then you will receive monthly payments automatically (if you received the correct number of child stimulus payments from Uncle Sam this year, then you should be all set). Roughly 88 percent of all U.S. households fall into this bucket.

If you did not file a return this year or last year, you can sign up for benefits using the IRS’s Child Tax Credit Non-filer Sign-up Tool. If you’ve had a new child since your last return, or are expecting one by year’s end — and would like to receive monthly CTC payments — you can inform the IRS via the Child Tax Credit Update Portal. If you need assistance navigating the IRS’s (rather clunky) websites, the nonprofit GetYourRefund can hook you up with an IRS-certified volunteer who will ensure that you get your due benefit.

How can you opt out of receiving monthly payments (and why might you want to)?

You can also use the Child Tax Credit Update Portal to opt out of receiving monthly benefits, and/or, update the IRS about your income status.
The reason why some might wish to opt out of monthly payments is to avoid an unexpected tax bill next year. Remember: Unless you update the IRS about your financial situation, it’s going to assess your eligibility for the 2021 CTC on the basis of your last tax return. Which means that, if you’re in a married household that earned $150,000 last year — but is now earning more than that — then you’re about to receive larger monthly checks than you’re legally entitled to. Thus, come next April, the IRS is going to tax back that overpayment. (Conversely, if your family earned more than $150,000 last year, but will earn less in 2021, then you’re poised to receive smaller monthly checks than you’re owed, and might want to update the IRS.)

On the one hand, there won’t be any penalty for accepting larger checks than the government actually owes you. And that money will amount to an interest-free loan from Uncle Sam. So you might just want to keep quiet, take your monthly CTC overpayments and invest them for a return. After all, you’ll only have to pay back the overpayment itself next spring.

Many households though will prefer to avoid the shock of a large tax bill next year. In which case, you’d be well-advised to alert the government to the uptick in your family’s earnings.

Will the expanded child tax credit become a permanent benefit?

Under existing law, the new CTC is a one-off: Come next year, the maximum benefit will drop back down to $2,000, the poorest will once again become ineligible, and 17-year-olds will cease to be children (for the purposes of this particular program, anyway).

But President Biden and congressional Democrats don’t want to see that happen. Democratic leaders in the House want to make the new CTC permanent. Some are open to making adjustments at the margins, so as to make the program function as a proper child allowance (and make it easier for the neediest to access their benefits). They want the $3,000-to-$3,600 benefits, and the eligibility of the neediest to receive them, to live on in perpetuity.

The president’s vision is more modest. Biden’s American Families Plan would only extend the 2021 benefit amounts through January 2026 — at which point, the CTC’s value would actually fall all the way down to $1,000. But the president’s plan would make America’s poorest families permanently eligible for full CTC benefits, even if they pay $0 in income taxes.

At first brush, Biden’s proposal may look bizarre. The president often brags about how his changes to the CTC have dramatically reduced child poverty. So, why would he want one of his signature programs to disappear mid-decade, drastically increasing the number of impoverished American kids in the process?

The short answer is: The expanded CTC is expensive. Over a ten-year window, the policy’s price tag is about $1.6 trillion. That hefty sum partly reflects the peculiar structure of Donald Trump’s signature tax-cut law. In 2017, Republicans increased the CTC’s maximum benefit from $1,000 to $2,000. But they also set that increase to expire in January 2026, in order to keep the bill’s overall cost from spooking the party’s deficit hawks. So, in the long run, making the 2021 CTC permanent means more than tripling the benefit’s size under status quo law.

That’s a problem for Biden, because a lot of moderate Democrats in Congress have a limited tolerance for increasing the deficit and raising taxes. Which means that there’s only so much new government spending they’re willing to authorize. And extending the new child tax credit isn’t the only expensive item on Biden’s agenda. The president also wants to spend $400 million on at-home care for the elderly, hundreds of billions on mitigating climate change, and a similar amount on paid leave, child care, universal pre-K, and free community college, among other initiatives. Therefore, to prevent the price of his overall agenda from getting too high for Joe Manchin’s taste, the White House is effectively betting that once the CTC is in place for five full years, Congress won’t let it expire — no matter which party controls Capitol Hill.

The logic behind that wager is simple: (1) It is very hard to roll back social welfare benefits once they’re in place (just look at what happened to Obamacare repeal), and 2) with the Trump Tax Cuts expiring at the end of 2025, congressional Republicans will surely be willing to extend the more generous CTC if Democrats extend tax breaks for the rich in exchange. But Biden’s plan is still a big gamble. Given the party’s structural advantages, there’s a good chance Republicans will control the White House and Congress by 2026. In which case, they won’t need to make trades with Democrats in order to extend their favorite regressive tax cuts.

Nevertheless, none of these considerations will matter much if Congress simply lets the new child tax credit expire next year, in defiance of Biden’s wishes. And that’s a real possibility. Republicans are unanimously opposed to the new CTC, and some are trying to mobilize public opposition to the policy. Democrats have a mere single-vote majority in the Senate. Already, moderate Democrats have voiced opposition to some of Biden’s proposed tax increases on the rich. If a single Democratic senator decides extending the CTC isn’t worth the cost, the policy will die.

There are some signs that moderate Democrats will fall in line and extend the new child tax credit. On Wednesday, moderate and progressive Democrats in the Senate reached agreement on a $3.5 trillion budget resolution – the first step in the process of passing a large spending bill on a partisan basis. The precise details of that bill still need to be squared away. But the tentative framework that Senate Democrats embraced Wednesday would extend the expanded CTC through at least 2023.

Ultimately, whether Congress passes that second bill could come down to constituent pressure. Any number of explainers can help you collect your monthly child benefit for 2021. But if you want to retain that support in the years to come, you may need to stop consulting the internet, and start calling your congressional representatives.

Everything You Need to Know About the 2021 Child Tax Credit