6 Things You Should Know About the New Child Tax Credit

The Internal Revenue Service on Thursday sent out the first monthly Child Tax Credit payments, delivering roughly $15 billion to about 35 million families representing about 60 million children, with the vast majority arriving via direct deposit.

The fully refundable payments provide up to $300 a month for each child under age 6 and up to $250 a month for each child ages 6 through 17. Upper-income families aren’t eligible, with the credit phasing down for individuals earning more than $75,000 and couples making more than $150,000.

Provided as part of the Covid rescue package Democrats passed in March, the payments are set to continue through the end of the year, though Democrats are looking to extend them as part of their budget blueprint. The six months’ worth of payments represent only half of the full credit, with the second half to be claimed when families file taxes next year.

President Joe Biden has proposed continuing the payments through 2025 as part of his American Families Plan, but the congressional budget package reportedly could cover fewer years, even as Democrats press to make the payments permanent. The payments are expected to cost about $120 billion a year.

Here are six things you should know about the policy.

Direct deposits work, both in terms of policy and politics: “It offers a psychology lesson that could inform public policy,” Claire Cain Miller says at The New York Times’s The Upshot. “Sending people money on a regular basis — no paperwork to file, no strings attached — achieves policy goals, and perhaps political ones, too. It’s a powerful way to make people aware of exactly what the government is doing for them.”

Biden hailed the payments as a “historic” and “transformative” achievement in a speech Thursday. More than 10 million American children live in poverty and the administration says that the payments could the child poverty rate in half, based on estimates from Columbia University researchers and other analysts. "This has the potential to reduce child poverty in the same way that the Social Security reduced poverty for the elderly," Biden said.

And this money is likely to be spent on kids: Cain Miller adds that “money labeled for children — the deposit that arrived in parents’ bank accounts Thursday was called CHILD CTC — is more likely to be spent on children, research shows. The previous child tax credit was one of many payments and credits folded into a final tax number each April, so it was easy for taxpayers to lose track of a credit meant for children.”

But it’s too soon to celebrate this as a success: There are “two big reasons to refrain from celebrating too much,” writes New York Times editorial board member Binyamin Appelbaum.

The first is that the program isn’t yet permanent. “Until that happens, the benefits of the aid are likely to be attenuated because families won’t have confidence the money will keep coming,” Appelbaum says.

The second is that the program faces a host of administrative challenges in reaching people who need the money most. The administration says that more than 4 million children live in households that are eligible but aren’t on the IRS mailing list, Appelbaum writes, and signing up for the payments is more difficult than it should be: “The I.R.S. paid a private company, Intuit, to help create a website to do so that requires an email address, doesn’t work well on mobile phones and is not available in Spanish, among other issues. (The choice of Intuit should have been a red flag: The company is in the business of making it difficult for people to file income taxes.)”

The government should be doing more to publicize the program, too, he says.

And the reduction in child poverty may be smaller than advertised: Estimates that the child poverty rate could be cut in half could prove to be too high, given the challenges of reaching some low-income families.

“The hard news is this population of parents let three stimulus payments sit on the ground. This is a hard population to reach; in the worst of times, you’ve offered thousands of dollars, and they have not signed up,” Gene Sperling, a White House official overseeing implementation of the American Rescue Plan, told The Washington Post. “That is why we must stay at it and work smarter and harder to get more people signed up.”

Sperling told the Post that a reduction in child poverty of 35% to 40% would still be about three times as large as the biggest single-year drops in the past.

Some say the program could have been designed better: “Some critics say these problems could have been avoided with a better policy design,” the Post’s Jeff Stein notes. “Democrats insisted on excluding wealthy Americans from the benefit, arguing that rich families did not need the help. That decision also made the provision more administratively cumbersome, according to some critics, because it meant the IRS — which has data on individual incomes — had to administer the program.”

Others have said that the IRS shouldn’t have been tasked with administering the program in the first place, and that the Social Security Administration would have been a better choice. (A child benefit plan put forth by Sen. Mitt Romney (R-UT) would have relied on Social Security.)

Some families will be in for a tax surprise: “The IRS is making the payments based on income shown on 2020 or sometimes 2019 returns. So families whose income has risen or who have had other changes could have to pay back some or all of the prepayments on their 2021 tax returns,” The Wall Street Journal’s Laura Saunders says. “Even filers who are eligible for the prepayments could see far smaller refunds or larger tax bills next year, because they are getting half their child credits up front.” About 1 million filers have already opted out of the prepayments, Saunders reports, citing an administration official.