Child Poverty Risks Rise as Enhanced Tax Credit Expires

The absence of the boosted credit could hit a lot of families hard.

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Key points

• The enhanced Child Tax Credit helped millions of households shore up their finances in 2021.
• Now that the boost is no longer in play, child poverty rates could climb substantially.

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Last year's American Rescue Plan did a lot more than just send stimulus checks into Americans' bank accounts. It also boosted a long-standing credit that families with children have long relied on.

Prior to 2021, the Child Tax Credit maxed out at $2,000 per child and was only partially refundable, so if someone claiming it had no tax liability, they couldn't collect their money in full. The Child Tax Credit was also previously paid out in tax refund form -- meaning, as a single lump sum.

Last year, the value of the Child Tax Credit increased to a maximum of $3,600 for children under age 6, and a maximum of $3,000 for children aged 6 to 17. The credit also changed to become fully refundable, giving more families the opportunity to receive its full value. Just as importantly, half of the credit was paid in monthly installments so recipients didn't have to wait on that money.

The boosted value of the credit, combined with the fact it was paid monthly, helped millions of households improve their finances and make ends meet during the second half of 2022. And given that impact, lawmakers were motivated to keep the boosted version around for another year.

President Biden included a one-year extension of the boosted Child Tax Credit in his Build Back Better plan. But that spending bill has been stalled in the Senate and doesn't seem to be going anywhere. As of now, the Child Tax Credit will revert to its pre-2021 value in 2022, and the monthly installment payments families enjoyed last year will be off the table. Not only might these changes put many households in a more precarious financial situation, but they could result in a massive uptick in child poverty rates.

Childhood poverty could soar

Last year, proponents of extending the enhanced Child Tax Credit argued that if those monthly payments were to stop, much of the progress made on the poverty front would be reversed. Now, research out of the Center on Poverty and Social Policy at Columbia University reveals that child poverty rates are expected to rise from 12% to 17% due to the boosted Child Tax Credit expiring. Not shockingly, Black and Latino children are expected to be hit the hardest, with poverty rates soaring to one out of every four children.

The absence of the boosted credit is coming at a time when inflation is soaring. In January, the Consumer Price Index reached 7.5%, representing a 40-year high.

The cost of living has risen so much that even moderate earners are having trouble making ends meet. But low-income households may really be feeling the crunch, especially without the monthly payments they were able to rely on from July through December of 2021.

Is the boosted Child Tax Credit completely off the table?

Whether lawmakers find a way to extend the boosted Child Tax Credit is yet to be determined. The primary snag is the Senate is divided on this specific issue, and Democratic lawmakers -- who want to see the enhanced credit stick around for another year -- don't have the full support of their party. Without it, the boosted version may be something families have to live without.

The good news is that the Child Tax Credit will not by any means go away this year. In a worst-case scenario, it will revert to its former maximum value, be partially refundable, and be payable in tax-refund form. But that's little consolation to the families who will once again plunge below the poverty line in light of these changes.