What's Next for the Child Tax Credit?

December 15th, 2021, marked the last deposit date for the child tax credit payment expanded under the American Rescue Plan (ARP). Though many had hoped the program would be continued, political leaders are struggling to find a way forward that makes the majority of Congress happy. As a result, many families have been left waiting and wondering what will come next.

Though a child tax credit has existed since 1997, it was significantly revised in the face of the global pandemic to offer parents financial relief. It was previously provided to eligible families as a single, partially refundable amount at tax time. The ARP allowed checks to be sent out monthly and made the credit fully refundable. It also substantially expanded the credit from $2,000 to $3,000 annually per child, with a $600 bonus for children under the age of 6.

The impact of the revision was undeniable. According to a report issued by the Center on Poverty and Social Policy at Columbia University in late October, the payments of up to $300 per child being deposited in bank accounts (along with other COVID-19-related government support) contributed to a 4.6% point (26%reduction) in child poverty in September of 2021 alone. Previous reports documented similar results, with an August report on its impact on material hardship reporting that the "more generous and inclusive monthly payment marks a historic, albeit temporary shift in the American welfare state's treatment of low-income families."

With the addition of the word "temporary" in the report's main takeaway, the center shines a light on the question of what happens next, now that the payments will stop. Both Democrats and Republicans had backed the credit through the Tax Cuts and Jobs Act under the Trump administration, and there is bipartisan support for some form of continuation. Still, the devil is in the details, and consensus has been hard to find.

Much of the disagreement about moving forward has revolved around whether the tax credit should be tied to a work requirement. Other issues are surrounding what agency should be responsible for its administration and to whom and how the tax credit should be distributed. Senator Mitt Romney has proposed that monthly cash be sent to all families regardless of income, with those above eligible income thresholds reconciling the difference on their income tax return. Others object that it doesn't limit the benefit to working families and those paying into the tax system. Still, others insist there be an oversight from social service agencies to ensure children benefit from the payments. Senator Joe Manchin called attention to the many grandparents who have assumed responsibility for raising their grandchildren and insisted that a mechanism be placed to ensure that the money follows the child rather than their parent.

To that last point, the Census Bureau conducted a survey of American households to see how they spent their child tax credit checks. Most used the cash for household expenses, including rent or mortgage payments, groceries, and utilities. Four in ten use the first few payments to pay down their debt, and many use it to pay for childcare and school supplies. Others used it to provide extras they might otherwise not have been able to afford, including music lessons, entertainment, or occasional take-out food during the pandemic.

While Congress works its way through the challenges of finding a replacement, many families for whom the extra money made a real difference are dreading the coming months, particularly with inflation rising. Some received the money and believed they might owe some of it back when tax filing season arises.

However, the monthly payments were "advance" credit payments, and any credit amount you are entitled to and didn't receive in advance will be credited to your 2021 tax return. So, you did not lose out on anything. You just didn't get it in advance.

The IRS will be sending Letter 6419, which will show the total amount you received in advance payments; you will need to reconcile the advance payments with the amount you are entitled to. Don't discard that letter and keep it with your other tax records and documents.

If your family received advance child tax credit funds, you are not alone in wondering what will come next from Congress for 2022. You also may need help with your upcoming tax return. If so, don't hesitate to contact our office for assistance.