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Sunday, March 14, 2021

Child Tax Credit Change for 2021 Brings Equity and Complexity

The American Rescue Plan Act of 2021 (P.L. 117-2; H.R. 1319; 3/11/21) provides a variety of financial and other relief for COVID-19 problems. Most of the changes are only for 2021.  At least two are for 2020 and mean that the IRS has to update forms and computer systems and get information out to taxpayers quickly including what to do if you already filed your return.  These two changes for 2020:

  1. $10,200 of unemployment compensation receivd in 2020 is non-taxable if the taxpayer's AGI is under $150,000 (if MFJ and both spouses received such comp, each get to exclude up to $10,200). [IRS guidance of 3/12/21]
  2. Not having to repay an advance Premium Tax Credit if the individual's income turns out to be over 400% of the federal poverty line.

Some of the 2021 changes are not solely tied to the pandemic as these changes help low-income families by making the tax system more equitable and have been proposed by President Biden and others. One of these changes is making the $2,000/child tax credit fully refundable and increasing the credit. 

For 2021, the credit is increased to $3,000 and to $3,600 if the child is under age 6. And for 2021, a child age 17 will qualify. 

Why equitable? I suggest at least two reasons:

  1. Very low-income taxpayers could only get up to $1,400 of the $2,000 credit refunded (occurs if their tax liabilty was under $2,000), while taxpayers with up to $400,000 could get the full $2,000 per child under age 17 applied against their tax. Why provide a bigger financial benefit to someone who doesn't need ir rather than to someone who does? 
  2. Relative to tax breaks higher income taxpayers get, the credit is low for lower income taxpayers. For example, someone with a $750,000 mortgage on their home is saving about $7,200 to $11,100 per year in taxes. That is a lot for someone who has the means to qualify for a $750,000 mortgage? Why such large tax breaks for higher income relative to lower income. And these breaks disguise the degree of progressivity in the tax systme. 
But why provide funds to someone when their tax liability has already dropped to zero? Well, financial benefits could instead be provided by a different system. But if tied to income as measured by one's tax return, perhaps the tax system is a better way to go. But, I do think looking at other government agencies such as the Social Security Administration to issue the benefits, including monthly, is something to look at particularly if it removes the complexity of these tax provisions. 

The CTC changes are estimated to raise millions of families out of poverty to help them and the economy. [See CBPP report of 3/2/21]

But what about the complexity? IRC Section 24 on the child tax credit, as modified by ARPA is lengthy with lots of special rules and definitions - it is complex! One reason is that there is a different phaseout formula for the additional CTC compared to that for the $2,000 CTC. And, the ARPA adds a new complex rule at Sectoin 7527A on how the IRS can get 50% of the credit to taxpayers "periodically" ("monthly" was changed to periodically in drafting the ARPA). This is to start by July 1, 2021. It will also require taxpayers to reconcile when they file their 2021 return and pay any excess advance back (although a safe harbor might apply to limit how much as to be paid back). The IRS has to get this system in place even though, unless renewed, it is only for 6 months!

To see the changes to IRC Section 24 and new Section 7527A, please take a look a this track changes document I assembled (it is 13 pages long, including all of section 24).

I don't believe the increased amount, refundability and periodic distribtuion of the credit are intended to be temporary as it ties to President Biden's tax reform proposals and those of others. Also, it should be a big help to millions of families, states and the economy. So, there will be near future discussions on these temporary changes. And even the $2,000 level CTC with its high phaseout are temporary through 2025 under the Tax Cuts and Jobs Act.

What do you think?


2 comments:

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