October 26, 2021

The fate of the recent expansion of the federal child tax credit is uncertain in the ongoing budget negotiations in Congress. What is clear is that poor and low-income families are putting the increased assistance to good use.

Nine out of 10 families earning less than $35,000 are spending the money on one or more essential living expenses, which include food, utilities, housing, clothing or education needs like books and after-school programs, according to an analysis of U.S. Census data by the Center on Budget and Policy Priorities.

The American Rescue Plan passed in March temporarily increased the credit from $2,000 to $3,600 per year per child for kids under age 6 and to $3,000 for older kids and teenagers. In another temporary provision in the legislation, the IRS sends the credit to families every month in the form of a monthly payment.

The child tax credit is also now fully refundable, which means that low-income people are eligible for the full credit even if they pay little or no income taxes. If the budget negotiations make this a permanent feature of the credit, the IRS would extend the federal assistance to 27 million more children in low-income families.

Unfortunately, the center estimates, there are some 4 million children in families with very low incomes that aren’t receiving the monthly payments, either because they didn’t file taxes in 2019 and 2020 or didn’t receive an economic relief check from the federal government. The IRS has created an online tool for parents to sign up and start receiving the credit.

The Center on Budget and Policy Priorities asked the people it surveyed about their specific uses for the monthly cash payments. Six out of 10 families earning under $35,000 said they are spending the money on food. About half are paying their utilities or housing expenses. Even the non-essential expenses seem like good uses for the extra funds, including car payments, childcare, and paying down debt.

Higher-income families also buy necessities with the extra cash. But low-income families struggle more to pay for their basic living expenses, and the center said they are using more of the money from the tax credit to pay for them. …Learn More

Money Culture

October 21, 2021

The federal tax code offers a nifty tax credit to low-income workers who save for retirement. If only it reached more people.

The Saver’s Credit offers what appears on its face to be a strong incentive: the IRS will return up to 50 percent of the amount low-income workers and married couples put into a retirement plan.

But Barbara Wollan, an 18-year volunteer in Iowa with the Volunteer Income Tax Assistance program, or VITA, which provides free tax preparation to low-income workers, said her clients often don’t qualify. The reason: the tax credit is not what the IRS calls “fully refundable.”

For example, a single person earning $19,750 or less is eligible for a tax credit equal to 50 percent of the amount saved – the maximum retirement plan contribution eligible for the credit is $2,000. The credits are either 10 percent or 20 percent for single workers earning between $19,751 and $33,000. (The income limits are higher for households.)

The catch is that the credit is subtracted from the taxes owed, and low-income people usually pay little or no taxes to the IRS after they take the standard deduction given to all taxpayers. If they don’t owe taxes, they don’t get the credit.

“To dream big about helping low-income people save for retirement, we would make it a refundable credit,” said Wollan, an educator with Iowa State University Extension and Outreach, which distributes research information in her state on topics like finance and agriculture.

Congress is considering providing a refundable credit of up to $500 to single and married savers even if they don’t owe anything at tax time. But lawmakers often get into a political disagreement about whether people who don’t pay taxes should get money back from the IRS.

Wollan feels her low-income clients should be rewarded for making what is, for them, a Herculean effort to save. “When I see that they have contributed to a 401(k) or other retirement account, I just want to jump up and down and cheer and pat them on the back,” she said. But “because their income is so low, they don’t get to take advantage of these credits, and that is so sad.” …Learn More