Starting today, you could be receiving another check in the mail (or direct deposit) from Uncle Sam. It’s not another stimmy per se, but it is another injection of cash into American households.

What is it? Why are you getting it? Who is paying for it? We have answers to all of your questions and more.

The Quick & Dirty

The Child Tax Credit (CTC) received a temporary boost from Washington. Beginning July 15, 2021, eligible parents will receive up to $300 a month for each child under age 6 and up to $250 for each one age 6 to 17 from now through the end of 2021. The IRS will send these payments mostly via direct deposit similar to stimulus checks that Americans received, but some people will get checks or debit cards in the mail.

Background

The Child Tax Credit is a federal tax incentive for families with children. Usually, households claim this tax credit on their tax returns. President Biden’s $1.9 trillion American Relief Plan (aka coronavirus rescue package) boosted the CTC program temporarily for the 2021 tax year, increasing the maximum payments families can receive per child from $2,000 to $3,600 per child for a young child (0-5 years old) and $3,000 per child for an older child (6-17 years old). In addition, Congress expanded the maximum age for minors eligible for the CTC from 16 years old to 17 years old. Half of the CTC will be paid out in monthly disbursements and the other half claimed as a credit on tax returns. These changes are just for this tax year.

How the CTC Works

The CTC reduces tax liability dollar-for-dollar of the value of the credit. The credit for qualifying children is fully refundable, which means that taxpayers can benefit from the credit even if they don’t have earned income or don’t owe any income taxes.

The CTC is normally given annually as a tax refund, but for the first time, it will be distributed monthly beginning in July through the end of the year. Treasury will issue half of the expected 2021 credit in periodic payments (generally of equal amounts) beginning after July 15, 2021. Families will claim the remaining half of the total 2021 credit when filing their 2021 income tax return in 2022. So, if you qualify, you will get a check or payment every month for the rest of 2021. 

Who qualifies for the CTC?

About 39 million families will reportedly receive the benefit. 

According to the IRS, generally, this increase in the maximum child credit of $1,600 per young child and $1,000 per older child gradually phases out at a rate of 5% as income exceeds specified thresholds until the credit amount equals the current-law maximum of $2,000 per child.

These thresholds are $75,000 for single filers, $112,500 for head of household filers, and $150,000 for married joint filers. (The actual income level at which the credit phases down to $2,000 per child depends on the number and age of qualifying children.) 

For many families, the credit then plateaus at its prior-law level of $2,000 per child and phases out when income exceeds the current law threshold of $200,000 ($400,000 for married joint filers). 

For larger families, the credit may never plateau at the $2,000 per child level, but simply continue to gradually phase out.

Eligibility for the CTC has been expanded to minors aged 17 years old. The prior maximum age for a child was 16.

Who much does this cost and who’s paying for it?

The Joint Committee on Taxation estimates this temporary one-year expansion of the child credit would cost $110 billion, mostly in FY2021 and FY2022.

President Biden wants to extend the CTC to 2025 while some Democrats want to make these changes permanent.

As taxpayers, we are paying for this tax credit expansion and the costs will undoubtedly be stretched out over time. Don’t forget that this is an advance on the credit normally taken when filing a tax return. This may lead to tax surprises next year when filing such as a smaller tax refund or a bigger tax bill.

What if I don’t want the payments?

If you don’t want this monthly payment, you can opt out.

There are good reasons for doing so: not wanting a big tax bill next, preferring a bigger refund next year, or to protest the out-of-control spending in Washington. So far about a million people have opted out according to the Wall Street Journal.

To opt out, you can go to the IRS’s child-tax-credit update portal and follow the instructions. 

Don’t Miss This

The Child Tax Credit boost is not about the pandemic, President Biden and congressional Democrats are pitching it as an aid to families to defray the rising costs of child-rearing and everyday life. There are three key points not to miss about the CTC temporary boost:

Big-spending is fueling inflation

Inflation is rising and families are feeling the pinch on their budgets from skyrocketing gas prices to diapers to bread and milk. Housing prices are also stubbornly high. Childcare was astronomical even before the pandemic. The Biden administration has made this $300 per child monthly check a cushion to soften the blow of inflation.

However, big-spending policies from Washington are driving inflation. Part of (though not all) the rising costs are due to worker shortages across industries. Shortages of waitstaff and cooks are making it difficult for dining establishments to resume normal operations. Shortage of workers in transportation and manufacturing are also creating bottlenecks to produce inputs, goods, and services that can keep up with pent-up pandemic demand being unleashed now. For example, lumber prices are rising not because there aren’t enough trees, but because of the shortage of workers to cut them down, process them, and transport them.

The worker shortages, in part, stem from retirements by an aging population, but also from workers who were laid off at the start of the pandemic who have yet to return. Generous federal unemployment benefits are incentivizing workers not to take job offers or even to seek employment. A new Morning Consult poll found that 1.8 million people would have accepted job offers had it not been for those enhanced unemployment insurance benefits. 

Employers have to offer higher wages to attract workers and increasing prices to offset those costs. Costs are also rising as there are fewer goods and services to purchase.

For families with multiple children, the monthly CTC payment may serve as another disincentive for unemployed workers to find employment. For example, an eligible family with three children ages two, five, and 10 will get up to $10,200 of child tax credits for 2021, and $5,100 of that should come in six monthly payments this year of $850.

Universal basic income by another name

UBI would almost never pass Congress, but these CTC monthly payments are a way of getting even more Americans accustomed to receiving monthly payments from the government. This is not targeted to those who actually need the aid but 39 million families to be used as they please.

Lawmakers know that creating and expanding entitlement programs is the way to grow the government. It is very difficult to end these benefits once implemented. It’s for that reason that President Biden wants to extend these changes for four more years and that some Democrats want them to be permanent.

Spend out-of-control now, pay later 

American households try to be careful with their money, but Washington is not. The CTC boost is another line item on the taxpayer credit card bill that will one day come due. The people on the hook to pay for the unsustainable debt being wracked up: our children and grandchildren. 

Even more, the CTC is a popular program for fraud and abuse. The inspector general report for the Department of the Treasury identified that one-third (33%) of additional CTC payments from tax years 2009 through 2011 were improper. We have yet to see what changes have been put in place to reduce the opportunity for fraud and abuse by subsequent administrations. Expanding the CTC now will open the door to more.

So, if you see that new direct deposit from the Treasury hit your account today, think critically about who will be paying for it and what Washington is trying to do.