A Well-Deserved (Tax) Break: A Short Explanation and Argument for the 2021 Changes to the Child Tax Credit

By: Owen Giordano

The COVID-19 pandemic has brought a wide swath of changes to the public since its onset in late 2019. While the most apparent legal implication concern questions of vaccine mandates[1] and agency actions citing public health concerns,[2] the pandemic has also ushered major changes to the US tax code. Concerning this, the most prominent of changes concern that of child tax credits. As such, this article aims to be a short primer into a subject that is currently quite fluid. The article begins with a general summary of the 2021 Child Tax Credit. Next, a short explanation as to what a tax credit is, what it means if such credits are refundable, and what exactly is special about the provisions offered for the 2021 fiscal year, is provided. Finally, a discussion concerning why the merits of an increase to the credits would outweigh the potential costs is included.

The Child Tax Credit provisions, which were designed to ease the financial burden of taxpayers with children, were expanded upon in 2021 to help lower- and middle-income families recover from the financial hardships wrought by the pandemic.[3] In addition, the credits were also designed to helps stimulate the US economy.[4] However, with the pandemic exacerbated due to the onset of new variants,[5] as well as the country’s unstable economic recovery because of staggering inflation,[6] there are currently major arguments in Congress concerning whether the credit should be further increased.[7] Central to this debate is if any increase would potentially prove burdensome for the federal government.[8]

A tax credit is means offered in the tax code for a taxpayer to limit their overall tax liability.[9] They are different from a deduction (despite the words being used interchangeably) because deductions are applied before the tax owed is calculated, whereas a credit is applied to after the tax owed is calculated. Simply put, at a given amount, a tax credit is more beneficial to a taxpayer than a deduction because a tax credit directly lowers their tax liability. Given how powerful tax credits can be in lowering taxpayer’s liability, Congress has opted to make many of them nonrefundable.[10] Refundability refers to the possibility that it is possible for a taxpayer to have negative tax liability to the government, with the government paying the taxpayer instead.[11]

At the most basic level, the current tax code for child tax credit is outlined by 26 I.R.C. § 24. In general, taxpayers are allowed to take up to $2,000 off their tax owed per qualifying child, subject to certain limitations.[12]  Notably, the Child Tax Credit is one of the few refundable tax credits given the importance Congress (intentionally or not) has placed on child-rearing through this credit.[13] That being said, to prevent potential abuse of this credit, Congress has enacted limitations on how much of the credit is deemed refundable.[14]

At present, Congress has recently inserted a provision that overrides the statute for the 2021 tax year only. Made as part of the CARES Act and signed into law in March 2021,[15] the provision allows for lower income families to take the full amount offered by the credit and has loosened the refundability limitations.[16] Given the financial hardships that many have gone through over the course of the pandemic, this provision offered a much-needed shot-in-the-arm (pun unintended) financially for many families.[17] By lowering their tax liability, more families have access to disposable income that they can use to buy essential goods and make long-term investments.

However, in a country where the pandemic is still an ongoing threat[18] and where inflation is hitting new highs whilst wages remain stagnant,[19] many are understandably concerned that the credit might not be enough at current. An increase in the credits would help to rectify this issue because the greater the credit, the more disposable income taxpayers have and, presumably, the more money they would be willing to spend. By deliberately supporting lower- and middle-income families with this credit, the uneven recovery the county is currently going through would be rectified.

The main arguments against increasing the benefits cite that the credits would undermine work incentives and potentially lead to “inappropriate payment and fraud.”[20] While such threats do exist with any sort of credit, it is important to realize that simply because these issues exist does not mean the benefits conferred by them are automatically negated. So far, it is unknown how much of the credit has been abused, if in any significant manner. As such, given the uncertain future the country faces both public health wise and financially, benefits from a slight increase in credit would likely outweigh the apprehensions surrounding the change.

Ultimately, an increase to credit allowance offered by the child tax credit would likely prove beneficial to the country at large. The credits would help the country recover less disproportionately and would incentivize further economic growth by increasing the disposable income available to everyone.

[1] Ariane de Vogue, Supreme Court Declines to Block New York Vaccine Mandate, Cable News Network (Dec. 13, 2021, 4:06 PM), https://www.cnn.com/2021/12/13/politics/supreme-court-new-york-vaccine-mandate/index.html

[2] CDC Issues Eviction Moratorium Order in Areas of Substantial and High Transmission, U.S. Dept. of Health & Human Services (Aug. 3, 2021), https://www.cdc.gov/media/releases/2021/s0803-cdc-eviction-order.html.

[3] Naomi Jagoda & Aris Folley, Child Tax Credit Expiration Adds Pressure for Democrats, Nexstar Media Group (Dec. 12, 2021, 8:00 AM), https://thehill.com/policy/finance/585380-child-tax-credit-expiration-adds-pressure-for-democrats.

[4] Id.

[5] What You Need to Know About Variants, U.S. Dept. of Health & Human Services (Dec. 13, 2021), https://www.cdc.gov/coronavirus/2019-ncov/variants/about-variants.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fcoronavirus%2F2019-ncov%2Fvariants%2Fvariant.html

[6] Lauren Aratani, US Inflation Rate Rose 6.8% in 2021, the Highest Increase Since 1982, Guardian News and Media Ltd. (Dec. 10, 2021, 9:06 AM), https://www.theguardian.com/business/2021/dec/10/us-inflation-rate-rise-2021-highest-increase-since-1982#:~:text=US%20economy-,US%20inflation%20rate%20rose%206.8%25%20in%202021,the%20highest%20increase%20since%201982&text=The%20US%20inflation%20rate%20rose,after%20rising%200.9%25%20in%20October.

[7] Naomi Jagoda & Aris Folley, Child Tax Credit Expiration Adds Pressure for Democrats, Nexstar Media Group (Dec. 12, 2021, 8:00 AM), https://thehill.com/policy/finance/585380-child-tax-credit-expiration-adds-pressure-for-democrats.

[8]  Id.

[9] Credits and Deductions for Individuals, Internal Revenue Service (Dec. 13, 2021), https://www.irs.gov/credits-deductions-for-individuals.

[10] See id (noting that only some credits will allow the federal government to payback the taxpayer).

[11] See id (noting the possibility of a “refund”).

[12] 26 I.R.C. §§ 24(a)-(b), 24(h) (2021).

[13] Refundable Tax Credit, Tax Foundation (2021), https://taxfoundation.org/tax-basics/refundable-tax-credits/

[14] 26 I.R.C. §§ 24(d) (2021).

[15] Naomi Jagoda & Aris Folley, Child Tax Credit Expiration Adds Pressure for Democrats, Nexstar Media Group (Dec. 12, 2021, 8:00 AM), https://thehill.com/policy/finance/585380-child-tax-credit-expiration-adds-pressure-for-democrats.

[16] 26 I.R.C. § 24(i) (2021).

[17] Juliana Menasce Horowitz et al., A Year Into the Pandemic, Long-Term Financial Impact Weighs Heavily on Many Americans, Pew Research Center (Mar. 5, 2021),  https://www.pewresearch.org/social-trends/2021/03/05/a-year-into-the-pandemic-long-term-financial-impact-weighs-heavily-on-many-americans/.

[18] Naomi Jagoda & Aris Folley, Child Tax Credit Expiration Adds Pressure for Democrats, Nexstar Media Group (Dec. 12, 2021, 8:00 AM), https://thehill.com/policy/finance/585380-child-tax-credit-expiration-adds-pressure-for-democrats.

[19] Id.

[20] Id.

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