IRS Commissioner Charles Rettig told the Senate Finance Committee on April 13 that the agency could begin delivering monthly 2021 Child Tax Credit (CTC) payments starting in July. Rettig was responding to provisions of the American Rescue Plan (ARP) that increased the CTC and directed the IRS to deliver half of a family’s credits between July and December of 2021.
The law gives the Treasury Department the flexibility to make quarterly rather than monthly disbursements, but either would be an improvement over the old law. Prior to the ARP, many low- and moderate-income parents would not get their 2021 credit until after they filed their 2021 tax return in the spring of 2022. Any advance payment would help provide a steady income for low-income households who struggle to pay their bills.
As was the case even before passage of the ARP, almost all families with children benefit from the CTC. Pre-ARP, 89 percent of families with children received the credit, now 92 percent will. Because the credit has been made fully refundable, even families with low incomes stand to receive substantial benefits, and significantly more than before the ARP. However, the enhanced credit and the advance payments are for one year only.
In past years, the only way the IRS could deliver the refundable portion of the credit, the part that exceeds taxes owed, was after a family filed their tax return. Higher income families could get their credits throughout the year by having less tax withheld each pay period. But withholding cannot be reduced below $0. That forced low-income families to wait to get their credits until tax time – very different from most safety net programs that deliver benefits monthly.
Research shows that, particularly among low-income families, incomes bounce around during the year. People may take temporary jobs and then are laid off. Or they may have to reduce hours to care for a child or an aging parent. This can make it difficult to meet recurring obligations such as paying for food and housing.
Monthly payments could help people pay those regular bills. Demonstrations of monthly cash payments have shown recipients were healthier, able to pay down debt, and experienced reduced strain from unpaid care work, food insecurity, and underemployment.
Quarterly payments also have been beneficial. Our recent analysis with Eunice Yau, conducted as part of a project for the Administration for Children and Families Office of Planning, Research, & Evaluation, summarized the effects of quarterly payments in the case of the earned income tax credit (EITC). In one demonstration that delivered part of the EITC quarterly, participants said the payments improved financial stability. This included missing fewer bills, paying fewer late fees, and borrowing less from payday lenders.
Nevertheless, it will be challenging for the IRS to pay the credit in advance. The agency must build a system to track close to real-time changes in family circumstances if the regular payments are to stay accurate and it must take on the unfamiliar role of making regular payments to beneficiaries.
Policymakers and advocates will need to watch closely the trade-offs between the potential benefits of advance, periodic payment and the IRS’s implementation challenges.
The experience will help policymakers better understand advance payments as they consider whether to make the ARP’s CTC changes permanent as well as whether to create periodic payments of the EITC in the future. And it will provide researchers a valuable opportunity to learn more about how the timing and structure of benefit payments can best meet the needs of those they are intended to benefit.
Advancing CTC payments – whether monthly or quarterly – could benefit recipients who are cash constrained right now. And the success or failure of that effort might determine the future course of refundable tax credits.