The Impact of the Enhanced Child Tax Credit on Lower Income Households
The American Rescue Plan, one of the most significant policy responses to alleviate child poverty in decades, made fundamental changes in enhancing the Child Tax Credit (CTC). In response to the pandemic, the law expanded the CTC for tax year 2021 to ensure a minimum level of economic support for all families raising children. It also adopted a form of periodic payment, disbursing from July to December half the expected credit in monthly payments per child of $300 or $360 (depending on the child’s age) and then providing the balance through tax return filing early in 2022.
Research conducted by SaverLife during the latter half of 2021, when recipients received monthly payments, documents how families used the funds to cover basic needs and to invest in their children. SaverLife found that monthly payments helped families afford groceries, pay rent, and cover other essentials, but that the families knew the payments were temporary and were therefore unlikely to earmark the funds for larger, longer-term investments.
SaverLife, Commonwealth, and Neighborhood Trust Financial Partners (Neighborhood Trust) followed up with CTC-eligible families after most filed their 2021 tax returns. We conducted interviews and surveys to assess the impact of the enhanced credit on families’ financial health. Although we focused on the second half of the CTC payment, which was delivered as a lump sum payment as part of the tax refund, we also asked recipients about their tax filing experience and what a continuation of an expanded credit would mean for their families.
We found that recipients generally received larger tax refunds than expected and that these contributed to financial stability—especially for households with incomes under $20,000—by helping parents stay current with housing payments and pay for essential items for their children.
Key Findings
Larger-than-anticipated refunds played a vital role in delivering financial stability.
A majority of recipients reported being more financially stable and able to spend more on basic household needs, save for emergencies, and keep up with essential bills. Only 5% said the CTC payments “didn’t make much of a difference.”
Many recipients delayed filing a return due to confusion or concerns about owing money back, but more households received larger tax refunds than they had expected.
Among the CTC recipients surveyed, 41% found the tax season more confusing than in the past. Over a third (34%) said they were more worried than usual about owing the IRS money.
CTC payments were not a disincentive for earning through work.
Consistent with other research, nearly all the CTC recipients we surveyed said the advanced CTC payments had not changed their work situation and, if continued, would not change how much they worked. Among the small number (12% of respondents) who said they could work less, nearly all (83%) hoped to work less so they could care for their child, someone else’s healthcare, or an elder.
Not extending the expanded CTC puts household financial stability at risk.
Although the specific effects would vary by household, the overall impact of ending the expanded CTC would be increased financial insecurity among families caring for children.
An expanded CTC matters to those most impacted.
A large majority of the recipients we surveyed (79%) said continuing the expanded CTC payments is extremely important, and another 15% said it is somewhat important. Just 4% of the recipients we surveyed said it was not that important whether the expanded CTC continued.
Conclusion
Our research adds to the growing body of research that the expanded CTC is an incredibly effective mechanism for alleviating the most pressing challenges faced by lower-income households with children. Both the monthly payments disbursed in 2021 and the remaining half delivered as part of 2022 tax refunds provided critical financial stability for families, having an enormous impact on their overall financial health. By providing flexible funds, the enhanced CTC allowed families to allocate resources where they needed it most.