Child Poverty

The Child Tax Credit Will Not Reach Every Child Until Congress Simplifies Complicated Tax Rules

June 10, 2021 | National

This blog was written by Emma Mehrabi and Zach Tilly. 

On July 15, families across the country will receive monthly payments of the Child Tax Credit (CTC). The expansion of the CTC, passed in the American Rescue Plan in March, will reach millions of children in the form of a major monthly cash benefit. For the first time, the IRS will now act in part as a social benefit agency in charge of administering and delivering cash payments to the 73 million children in the United States. While the expansion of the monthly cash benefit is temporary for 2021, permanency is on the horizon for this groundbreaking program, and improvements are needed to reach every child. 

Right now, the CTC is not responsive enough to follow where the child is no matter their zip code or family composition. That’s because the current expanded CTC still leaves out hundreds of thousands of children due to arcane rules built into the tax code, collectively known as the “child-claiming” rules. These rules, which predate the expanded CTC, decide which parents and caregivers get to claim children for the cash benefit. The rules are not flexible for real families’ lives and do not reflect the reality of many of our own personal experiences with family upbringing and caregiving. 

We know that families are beautifully messy, evolving, and changing frequently. So many of us can personally understand the reality of what it means to switch between households with two or more caregivers when your parents are separated, to live with another family member or a friend during the year because you needed help, or even to spend brief periods in the child welfare system. Whoever they are, caregivers should be able to access the CTC benefit to help them meet the needs of raising children. One grandmother who cares for her grandchild, for example, recently told the Children’s Defense Fund that the CTC will help her pay bills and cover other monthly costs. For this program to be successful and to build families’ economic well-being, these critical monthly payments must meet every family where they are and reach every child. 

Our new policy brief written by the Children’s Defense Fund and the Center for the Study of Social Policy (CSSP) outlines why the CTC must reach every child to respond to the reality of families’ lives. Below, we’ve included a brief summary of our proposal and why the current “child-claiming” rules are problematic for a permanent CTC: 

  • Rule 1: The Relationship Test—prohibits caregivers from claiming the CTC unless they are the child’s parent, grandparent, sibling, aunt or uncle (or a similarly close step-relative or relative by marriage). This test alone excludes about 330,000 children, disproportionately Latinx children, who live with and are cared for by more distant relatives or family friends.
  • Rule 2: The Residency Test—denies benefits to children who do not spend at least six months in any single household during the course of a year. This rule disqualifies some children who move between the homes of different family members or caregivers throughout the year, as well as children whose caregivers have split custody arrangements, who are unhoused, or who spend a portion of the year in out-of-home placements in the child welfare or juvenile justice systems. It is difficult to know exactly how many children are excluded from the CTC based on the Residency Test alone, though every year millions of children experience housing instability, homelessness, or placement in the child welfare or juvenile justice systems. Moreover, some groups estimate that 3 million children switch households from year to year, further underscoring just how fluid families’ lives are. 

To ensure that every child benefits from the expanded CTC, Congress must change the CTC eligibility requirements to reach every child. Specifically, Congress should: 

  • Replace the existing child-claiming rules with a single “Primary Caregiver” test that would allow all children to be claimed by their caregiver, regardless of the caregiver’s legal or formal relationship to the child.
  • Require the IRS to determine eligibility for the CTC on a monthly, rather than an annual basis. This change would allow the credit to “follow” children who may move between households during a year and therefore may currently miss out on the CTC due to the Residency Test.
  • Allow caregivers who share responsibility for a child to evenly split the credit or assign the benefit to a single caregiver, as they choose.
  • Allow children with no relation to an adult caregiver to claim the credit on their own behalf.

For more information, read our jointly published policy brief that provides more detail on these recommendations and makes additional recommendations regarding youth who are unhoused, involved in the child welfare system, or involved in the juvenile justice system. It is time for Congress to rewrite the child-claiming rules to ensure the CTC follows each child, no matter their household composition, family structure, or where they live.