Keeping the Child Tax Credit Fully Refundable Could Slash Poverty Rates by 19%

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This year, for the first time, the Child Tax Credit is fully refundable. Retaining that feature could have a huge impact.

Key points

  • The Child Tax Credit is normally just partially refundable, so people with no tax liability can't claim its full value.
  • This year, the credit has enjoyed a number of enhancements that include full refundability, and lawmakers are fighting to make that specific change permanent.

The American Rescue Plan, the massive relief bill signed into law in March, featured a number of key provisions designed to help the public recover from the financial blow of the pandemic. In addition to boosting unemployment benefits through early September and sending a third round of stimulus checks into Americans' bank accounts, the bill enhanced a long-standing credit for parents -- the Child Tax Credit.

Prior to 2021, the Child Tax Credit had a maximum value of $2,000 per child, and it was paid as a lump sum in tax refund form. Also, only $1,400 of the credit was refundable, which means if someone who claimed it owed no tax, they wouldn't get the credit's full value.

This year, the Child Tax Credit is worth up to $3,600 for children under the age of 6 and up to $3,000 for children aged 6 to 17. Half of the credit is also being paid in monthly installments that began in July, with the remaining half to be paid in 2022.

Just as importantly, the Child Tax Credit is fully refundable this year. If a family has no tax liability, they can still collect all of the money they're entitled to.

Initially, lawmakers were hoping to make the enhanced Child Tax Credit a permanent part of the tax code -- especially given the positive impact it's had already. But they've since had to scale back, and now, it looks like the boosted credit may only stick around for another year.

But on a positive note, lawmakers are still working to make the Child Tax Credit fully refundable on a permanent basis. If they're successful, it could make a huge difference in the lives of many families.

An important change

Research by the Jain Family Institute reveals that if the Child Tax Credit were to become fully refundable on a permanent basis, it could reduce child poverty rates in the U.S. by 19%. That alone is fueling the argument to keep that one feature in place for the long haul. In fact, full refundability of the Child Tax Credit could reduce the poverty rate among African American children by 30%.

Even if the credit reverts back to its former value so it maxes out at $2,000 per child, families will at least have an easier time claiming that $2,000 in full. And that could help a lot of lower and middle earners shore up their finances, especially in the wake of the pandemic.

Will full tax credit refundability fly?

The high cost of keeping the boosted Child Tax Credit in place on a permanent basis is what forced lawmakers to pull back on the idea. But continuing full refundability of the credit is less expensive than keeping the credit at a higher value. Retaining that feature is more than feasible.

It's estimated that keeping the larger value of the Child Tax Credit in place would cost a whopping $45 billion. Meanwhile, keeping the credit fully refundable has a price tag of just $17 billion ("just" being a relative term, of course).

Two more installments on the way

Families who are collecting the Child Tax Credit already can look forward to two more installment payments this year. The first should arrive on or around Nov. 15 and the second should arrive on or around Dec. 15. While those installment payments won't be around come January, the remainder of this year's Child Tax Credit will be available to families once they file their 2021 tax returns in 2022.

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