American Rescue Plan Act Includes Critical Expansions of Child Tax Credit and EITC
Two key tax credit provisions in the American Rescue Plan Act will provide significant help to those on the fault lines of some of the pandemic’s worst economic effects. People who have lower incomes, are Black or Latino, have less than a college education, or work in face-to-face service occupations have long faced barriers to high-paying jobs and opportunity, which the pandemic and its economic fallout have widened. The Act’s temporary provisions making the full Child Tax Credit available to all children except those with the highest incomes (sometimes called making the credit “fully refundable”) and making an expanded Earned Income Tax Credit (EITC) available to far more low-paid workers not raising children in the home (so-called “childless workers”) will result in historic reductions of child poverty and provide timely income support for millions of people, including millions of essential workers.
"The American Rescue Plan Act, by making one significant set of changes to the Child Tax Credit, will lift another 4.1 million children above the poverty line, cutting the number of children in poverty by more than 40 percent."The current Child Tax Credit and EITC together lift more children above the poverty line, 5.5 million, than any other economic support program. This level of poverty reduction was achieved through multiple expansions of the EITC and Child Tax Credit since their respective enactments in 1975 and 1997. The American Rescue Plan Act, by making one significant set of changes to the Child Tax Credit, will lift another 4.1 million children above the poverty line, cutting the number of children in poverty by more than 40 percent. Permanently enacting this historic provision — along with the EITC provision, which will stop the federal tax code from taxing millions of workers without children into or deeper into poverty — would be a landmark achievement, and should be an urgent priority for policymakers.
The American Rescue Plan Act expansions will help many hard hit by the current crisis. Many in essential jobs have faced a higher risk of infection and death due to their jobs, while many others lost their jobs or saw their incomes fall due to pandemic-related closures or reduced hours. Jobs in low-paying industries were down more than twice as much between February 2020 and February 2021 as jobs in medium-wage industries and more than three times as much as in high-wage industries. Due to employment discrimination and unequal opportunity in education and housing, among other factors, gaps in unemployment between Black and Latino workers on one hand and white workers on the other widen quickly in recessions and narrow much more slowly after an economic recovery begins. Today the Black unemployment rate remains at 9.9 percent and the Latino rate at 8.5 percent, while the white unemployment rate has fallen back to 5.6 percent.
The Act’s two tax credit expansions will do much to alleviate these harmful effects, by:
Making the full Child Tax Credit available to all children except those with the highest incomes. Some 27 million children — including roughly half of all Black and Latino children and a similar share of rural children — received less than the maximum $2,000-per-child tax credit under prior law because their parents earn too little, even as middle- and higher-income families received the full amount. The Act makes the full Child Tax Credit available to children in families with low earnings or that lack earnings in a year, and it increases the credit’s maximum amount to $3,000 per child and $3,600 for children under age 6. It also extends the credit to 17-year-olds. The increase in the maximum amount begins to phase out for heads of households making $112,500 and married couples making $150,000. These changes will lift 4.1 million children above the poverty line — cutting the number of children in poverty by more than 40 percent. They also will lift 1.1 million children above half the poverty line (referred to as “deep poverty”). Black and Latino children in particular, whom the credit disproportionately left out or left behind, will benefit.
Making an overdue EITC increase for low-paid working adults not raising children in the home. The EITC is a powerful wage subsidy but has suffered from a glaring flaw: it largely excluded workers not raising children, providing only a tiny credit to a very small number of these workers. The American Rescue Plan Act fixes this flaw at a critical time by raising the maximum EITC for workers without children from roughly $540 to roughly $1,500, and the income cap for these adults to qualify from about $16,000 to at least $21,000. It also expands the age range of eligible workers without children to include younger adults aged 19-24 (excluding students under 24 who are attending school at least part time), as well as people aged 65 and over. This will provide timely income support to over 17 million people who do important work for low pay, including the 5.8 million people who are currently the lone group that the federal tax code taxes into, or deeper into, poverty, in large part because their EITC is too low.
Expanded Child Tax Credit Will Cause Historic Reduction in Child Poverty
Low-income children, disproportionately children of color, have been particularly hard hit by the pandemic and its related economic and educational harms. Between 6 and 10 million children live in a household where the children didn’t eat enough because the household couldn’t afford it, according to the most recent Census data. Many of these same children also have a higher risk of losing school instruction time due to the pandemic; “[l]earning loss will probably be greatest among low-income, black, and Hispanic students,” one analysis found.
Raising the incomes of children growing up in poverty through policies such as the Child Tax Credit can make an important difference in children’s lives now and in the long term, a congressionally chartered report issued in 2019 by a National Academy of Sciences (NAS) panel on child poverty explained. “The weight of the causal evidence does indeed indicate that income poverty itself causes negative child outcomes, especially when poverty occurs in early childhood or persists throughout a large portion of childhood,” concluded the panel. The better outcomes that are linked with stronger income assistance include healthier birthweights, lower maternal stress (measured by reduced stress hormone levels in the bloodstream), better childhood nutrition, higher school enrollment, higher reading and math test scores, higher high school graduation rates, less use of drugs and alcohol, and higher rates of college entry. The NAS panel devised two packages of policy proposals aimed at cutting child poverty in half, one of which included as a centerpiece a $2,700-per-child “child allowance” that is very similar to the American Rescue Plan Act’s expanded Child Tax Credit. (The NAS plan included several other substantial components, including an EITC expansion, that taken together are larger than the Act’s expanded Child Tax Credit.)
The American Rescue Plan Act’s Child Tax Credit expansion will deliver significant additional income to low-income children and their families. It will make the full credit available to 27 million children — including roughly half of all Black and Latino children and a similar share of children who live in rural areas — whose families haven’t qualified for the full credit because their parents lack earnings or have earnings that are too low. (See Appendix Table 1 for estimates by state). Of these 27 million children, an estimated 9.9 million are Latino, 5.7 million are Black, and 814,000 are Asian American. (See Appendix Table 2 for state-specific estimates by race/ethnicity.)
Among the 4.1 million children whom the expansion will lift above the poverty line, 1.2 million are Black and 1.7 million are Latino. Of the 9.9 million children it will lift above or closer to the poverty line, 2.3 million are Black, 4.1 million are Latino, and 441,000 are Asian American.
To see what this can mean to individual families, consider these examples:
- A single mother of a toddler, who earns $10,000 a year providing in-home care to older people (with work hours that fluctuate significantly from month to month), previously received a Child Tax Credit of $1,125. Under the American Rescue Plan Act, she will receive $3,600, a gain of $2,475.
- A single mother with a 4-year-old daughter and 8-year-old son, who is out of work for the year due to a health condition, previously received no Child Tax Credit at all, adding to the family’s financial insecurity. Under the Act, she will receive the full Child Tax Credit of $3,600 for her daughter and $3,000 for her son to help with the children’s expenses.
- A married couple in which one spouse earns $20,000 as a short-order cook and the other cares for their 3-year-old son and 7-year-old daughter previously received a credit of $2,625 — well below the $4,000 credit that a higher-income family with two children received. Under the Act, they will receive the full Child Tax Credit of $3,600 for their son and $3,000 for their daughter, for a family gain of $3,975.
The Child Tax Credit expansion will provide important help to people in a myriad of jobs that pay little and often have fluctuating schedules, including people caring for the elderly, driving buses, cooking and serving meals, and doing many other kinds of important work. (See Table 1.) These occupations are also not conducive to remote work, raising people’s risk of infection during the current crisis.
An estimated 65.7 million children will receive a larger Child Tax Credit under the expansion, which will deliver economic support to large numbers of children in every state, including 17.5 million Latino children, 9.4 million Black children, and 2.8 million Asian American children. (See Appendix Table 3.)
|People in Selected Essential Occupations Who Will Benefit From Child Tax Credit Expansion in American Rescue Plan Act|
|Occupation||Number of workers who will gain||Workers who will gain as a share of all workers aged 18 and older in occupation|
|Truck and delivery drivers||1,069,000||27%|
|First-line supervisors/managers of retail sales workers||995,000||29%|
|Nursing, psychiatric, and home health aides||801,000||35%|
|Janitors and building cleaners||682,000||27%|
|Personal and home care aides||497,000||31%|
|Child care workers||474,000||36%|
|Miscellaneous agricultural workers||381,000||38%|
|Food preparation workers||315,000||28%|
|Health practitioner support technicians||219,000||31%|
|Hand packers and packagers||173,000||26%|
|First-line supervisors/managers of food preparation and serving workers||164,000||26%|
Act Protects Families With Low Incomes From Repaying Large Amounts They Receive in Advance
The American Rescue Plan Act will provide families with advance payments of their Child Tax Credit for tax year 2021. Between July and December 2021, these advance payments will be provided monthly (or perhaps less frequently, if the IRS has implementation challenges) to the tax filer who claimed the child on a previous year tax return (2020 or, if not available, 2019).
One drawback to providing families with advance payments of their Child Tax Credit is that when tax filers submit their tax return for the year in which they received advance payments, they could end up ineligible for those payments. While changes in income could affect the amount of the credit for which someone is eligible, a more significant issue will arise when a child who lived with the tax filer in the prior year does not live with that same tax filer in the year for which the advance payments were made. For example, a child’s father may have claimed the child in the prior year (2020) but the child may live with her mother in 2021. In this case, the father may receive advance payments for the 2021 Child Tax Credit but then learn that he is ineligible for the tax credit when he files his 2021 tax return because the child did not live with him this year. Without appropriate safeguards, low-income tax filers in this situation could owe large amounts to the IRS to repay the federal government for advance payments they received.
More than 3 million children in any given year live with a different adult than they lived with the prior year, we estimate using longitudinal Census data, and a large share have modest incomes.a The American Rescue Plan Act includes important safeguards to protect these low-income tax filers who receive advance payments and are later found ineligible, limiting the extent to which they will have to repay the federal government. Under the Act, single individuals with incomes below $40,000, heads of households with incomes below $50,000, and married couples with incomes below $60,000 will not have to repay amounts received in advance.
For those with incomes above these thresholds, the amount they have to repay will phase in, though the repayments could be significant for some households. A single individual with income of $55,000 who received $1,500 in advance payments for a child who no longer lives with them would owe back $250; if the filer’s income were $60,000, they would owe back $500. (A filer would owe these amounts back to the IRS even if they spent the advance payment toward care for the child.)
Because of these safeguards, a large share of those who might be at risk for owing money back will either not be required to repay the advance payments or will only have to repay a partial amount.
The Act also provides a mechanism for families to opt out of the advance payment, but it is likely that many filers will not understand the provision or mechanism for opting out well enough to know if they should exercise this option.
If the Act’s Child Tax Credit changes (including the advance payments) are later made permanent, further steps will be needed to reduce the number of people who receive advance payments and then are found ineligible for the credit and to ensure that those who are in this situation are not asked to repay amounts they cannot afford.
a CBPP calculation based on Census’ Survey of Income and Program Participation data for children who changed parents between 2013 and 2014.
A Meaningful EITC for Workers Without Children
The American Rescue Plan Act expands the EITC for over 17 million adults not raising children at home who work hard at important, but low-paid, jobs. The EITC is a highly successful wage subsidy that’s earned bipartisan support over the years, but until now it largely excluded adults who aren’t raising children in their homes, and it completely excluded young workers without children trying to gain a toehold in the labor market.
Adults not raising children are the lone group that the federal tax code actually taxes into, or deeper into, poverty, partly because their EITC has been so meager. Some 5.8 million workers aged 19-65 (excluding full-time students aged 19-23) without children — including 1.5 million Latino and over 1 million Black workers — are taxed into or deeper into poverty.
For workers without children, the Act raises the maximum EITC from roughly $540 to roughly $1,500 and raise the income limit to qualify from about $16,000 to at least $21,000. It also expands the age range of workers without children eligible for the tax credit to include younger adults aged 19-24 (excluding students under 24 who are attending school at least part time), as well as people 65 and over.
To see how this will benefit these workers, consider a 25-year-old single woman who worked roughly 30 hours a week throughout 2020 as a cashier at a convenience store and earned about $9 an hour. Her annual earnings of $13,700 were just above the poverty line of $13,621 for a single individual. But under prior law, federal taxes pushed her into poverty:
- Some $1,048 — 7.65 percent of her earnings — was withheld from her paychecks for Social Security and Medicare payroll taxes.
- When filing income taxes, she could claim the $12,400 standard deduction, which left her with $1,300 in taxable income. Since she was in the 10 percent tax bracket, she owed $130 in federal income tax.
- Thus, her combined federal income and payroll tax liability, not counting the EITC, was $1,178. She received a small EITC of $160, so her net federal income and payroll tax liability was $1,018.
- In other words, her earnings were just above the poverty line, but federal taxes pushed her income about $940 below the poverty line.
- Under the American Rescue Plan Act, her EITC will grow to $1,116, raising her income after federal income and payroll taxes to $29 above the poverty line.
All told, the Act will benefit 17.3 million workers without children across the country, including roughly 2.8 million Black, 2.8 million Latino, and 678,000 Asian American workers. (See Appendix Table 4 for estimates by state and by race/ethnicity.)
The top occupations that will benefit include cashiers, food preparers and servers, and home health aides. (See Table 2.) The pandemic has helped the nation better understand and appreciate these workers and millions of others who work for low pay and the essential role they play in keeping this economy running, even while they often lack benefits that many other workers take for granted, such as paid sick days. They deserve more than the meager EITC in prior law, and the American Rescue Plan Act will provide concrete, meaningful help.
|Workers Without Children in Selected Essential Occupations Who Will Benefit From EITC Expansion in American Rescue Plan Act|
|Occupation||Number of workers who will gain||Workers who will gain as a share of all workers aged 19 and older in occupation|
|Janitors and building cleaners||529,000||21%|
|Laborers and freight, stock, and material movers, by hand||526,000||23%|
|Personal and home care aides||472,000||30%|
|Truck and delivery drivers||411,000||10%|
|Nursing, psychiatric, and home health aides||386,000||17%|
|Stock clerks and order fillers||383,000||26%|
|Food preparation workers||312,000||30%|
|Child care workers||304,000||24%|
|First-line supervisors/managers of retail sales workers||258,000||7%|
|Hand packers and packagers||202,000||31%|
|Miscellaneous agricultural workers||178,000||18%|
|APPENDIX TABLE 1|
|Estimated Number of Children Who Will Benefit From Child Tax Credit Expansion in American Rescue Plan Act, by State|
|State||Children under 17 left out of full $2,000 Child Tax Credit in prior law who will benefit from expansion||Children under 18 lifted above the poverty line by expansion||Children under 18 lifted above or closer to the poverty line by expansion||Children under 18 who will benefit from expansion||Share of children under 18 who will benefit from expansion|
|District of Columbia||52,000||8,000||25,000||94,000||76%|
|APPENDIX TABLE 2|
|Estimated Children Under 17 Left Out of Full $2,000 Child Tax Credit in Prior Law, by State and by Race/Ethnicity|
|State||Total||White||Black||Latino||Asian||Another race or multiple races|
|District of Columbia||52,000||N/A||42,000||N/A||N/A||N/A|
 These credits lifted 5.5 million children above the poverty line in 2018 and 5.1 million children in 2017.
 Center on Budget and Policy Priorities, “Tracking the COVID-19 Recession’s Effects on Food, Housing, and Employment Hardships,” updated March 10, 2021, https://www.cbpp.org/research/poverty-and-inequality/tracking-the-covid-19-recessions-effects-on-food-housing-and.
 Center on Budget and Policy Priorities, “Chart Book: Tracking the Post-Great Recession Economy,” updated March 5, 2021, https://www.cbpp.org/research/economy/tracking-the-post-great-recession-economy.
 “Tracking the COVID-19 Recession’s Effects on Food, Housing, and Employment Hardships,” op. cit.
 Emma Dorn, “COVID-19 and student learning in the United States: The hurt could last a lifetime,” McKinsey & Co., June 1, 2020, https://www.mckinsey.com/industries/public-and-social-sector/our-insights/covid-19-and-student-learning-in-the-united-states-the-hurt-could-last-a-lifetime#.
 Robert Greenstein et al., “Improving the Child Tax Credit for Very Low–Income Families,” US Partnership on Mobility from Poverty, April 2018, https://www.mobilitypartnership.org/improving-child-tax-credit-very-low-income-families.
 Senator Mitt Romney proposed a similar expansion in the Child Tax Credit, making it fully available to all low-income children and increasing the amount from $2,000 to $3,000 for children between ages 6 and 17 and to $4,200 for children under 6. The major differences between the temporary changes in the American Rescue Plan Act and the permanent Romney plan are that the Romney plan provides the increase to families with much higher incomes, beginning to phase out for married couples making $400,000, and that it pays for the proposal with sharp cuts in other income support programs for low-income families, including a 65 percent cut in the EITC and the elimination of the Temporary Assistance for Needy Families (TANF) block grant. States use TANF to provide income assistance to 1.1 million families with children who have very low incomes and to fund a set of other services, including child care, transportation assistance, and services for children at risk of being removed to foster care and their families.
 Racial and ethnic categories in this report do not overlap. Unless otherwise noted, figures for each racial group such as Black or Asian American do not include individuals who identify as multiracial or of Latino ethnicity. Latino includes all people of Hispanic, Latino, or Spanish origin regardless of race. Data are not available for people living in the territories.
Figures for children identified as American Indian or Alaska Native (AIAN) are particularly sensitive to definition. Among the roughly 2.0 million children identified as AIAN alone or in combination, regardless of Latino ethnicity, 180,000 will be lifted above the poverty line and 344,000 will be lifted above or closer to the poverty line by the Act’s Child Tax Credit expansion. (If we apply the non-overlapping categories this report uses for other groups, only 684,000 children are considered AIAN alone, not Latino; 70,000 of them will be lifted above the poverty line and 111,000 of them will be lifted above or closer to the poverty line by the Child Tax Credit expansion.) Data for children identified as Native Hawaiian or Pacific Islander (NHOPI) are not provided due to limited sample size.
These figures are preliminary CBPP estimates based on U.S. Census Bureau’s March 2019 Current Population Survey, using 2020 tax parameters and incomes adjusted for inflation to 2020 dollars. These calculations use the Supplemental Poverty Measure, which counts more forms of income than the “official” poverty measure (among other differences).
 Among the roughly 2.0 million children identified as AIAN alone or in combination, regardless of Latino ethnicity, about 1.9 million will benefit from this Child Tax Credit expansion. (If we apply the non-overlapping categories this report uses for other groups, only 684,000 children are considered AIAN alone, not Latino; about 640,000 of them will benefit from this expansion.)
NHOPI estimates are also particularly sensitive to definition. Among the roughly 619,000 children identified as NHOPI alone or in combination, regardless of Latino ethnicity, about 565,000 will benefit. (Data on children identified as NHOPI alone, not Latino, are not provided due to limited sample size.)
Preliminary CBPP analysis of March 2019 Current Population Survey, using 2020 tax parameters and incomes adjusted for inflation to 2020 dollars.
 CBPP estimates based on the U.S. Census Bureau’s March 2019 Current Population Survey, using 2020 tax parameters and incomes adjusted for inflation to 2020 dollars. The estimates count all workers aged 19-65 (excluding full-time students aged 19-23) who are pushed below the Census poverty thresholds — or further below them — by their federal income tax liability (if any) and the employee share of the payroll tax. The estimate excludes full-time students aged 19-23 because, under current law, their parents can claim them as qualifying children for the larger EITC for families with children. Poverty status is determined at the level of the tax filing unit. We use the 2019 Census official poverty threshold appropriate for the tax unit based on the number and age of the tax unit members, inflated to 2020 dollars.
 Senator Mitt Romney proposed to significantly reduce the EITC for families with children while expanding the EITC for workers not raising children. For the latter group, his proposal would raise the maximum EITC from roughly $530 to $1,000 for a single filer and $2,000 for a married couple, and raise the income limit to qualify from about $16,000 to $17,000 for a single filer and from about $22,000 to $34,000 for a married couple. His proposal also increases the phase-in and phase-out rates for the credit.
 The Act also extends eligibility to former foster youth and youth experiencing homelessness starting at age 18.