Advancing Refundable Tax Credits: Policy Considerations

Advancing Refundable Tax Credits: Policy Considerations

April 21, 2021
Advancing Refundable Tax Credits: Policy Considerations
Many policymakers have expressed interest in having the
In September and October 2020, the IRS, on behalf of
Treasury “advance” refundable tax credits in installments
Treasury, sent notices to approximately 9 million taxpayers
(potentially monthly or quarterly). This approach is an
that were potentially eligible for the first round of stimulus
alternative to providing the credits as an annual lump sum
checks. According to data provided to CRS by the IRS,
(i.e., as a tax refund), which may help households better
between September 19, 2020 (the date notices were first
meet their ongoing needs. In the American Rescue Plan Act
released) and November 21, 2020 (the date the non-filer
of 2021 (ARPA; P.L. 117-2), Treasury is directed to
portal closed), approximately 1.2 million returns were
advance half of the temporarily expanded child credit
accepted. It is unclear exactly how many of the 9 million
during the last six months of 2021.
notice recipients were ultimately eligible, nor is it clear the
extent to which the notices increased use of the non-filer
There are four general considerations that policymakers
portal. Nonetheless, this may be indicative of the number of
may face when designing advance payments of refundable
households who were eligible for the first payment, but did
tax credits for families:
not receive it in 2020.
 the lack of data on all eligible households;
ARPA Child Credit: ARPA directs the Treasury to create
 the lagged nature of available annual data;
a portal to allow households to modify information related

to potential advance payments of the child tax credit. It is
changes in households’ circumstances; and
unclear if otherwise eligible non-filers will be able to use
 whether and how households would be required to
this portal to provide new information, or whether the portal
reconcile (and perhaps repay any excess) advance
will only allow tax filers to update existing tax return
payments when taxes are filed.
information. If new information cannot be provided on the
portal, the “application” for the advanced credit will be a
The term household as used in this In Focus refers to
2020 income tax return.
the individuals who are or would be listed on a federal
income tax return (if it were filed); it is used
Lagged Nature of Available Annual Data
interchangeably with taxpayer and tax filer. Other
Federal tax law assesses taxes on annual taxable income.
analyses may refer to a household as a tax unit.
Thus, the federal income tax system collects data via tax
returns on annual income and annual family structure (i.e.,
This In Focus discusses these considerations in the context
marital status and number of children). For example, a 2020
of the advance child credit (“ARPA child credit”).
income tax return will include a household’s total income in
Policymakers may choose different approaches when
2020, as well as their marital status (e.g., filing a joint tax
considering advancing tax credits for families in the future.
return indicates two adults are married) and the number of
children they claim for various child-related tax benefits in
Lack of Data on Eligible Households
2020.
The federal tax system does not include data on all
households potentially eligible for an advance credit.
Tax filing status for a given year depends on whether a
Hence, unless “eligible non-filer” families manually
taxpayer is married or unmarried and whether or not the
provide that information to the IRS, they will generally not
taxpayer has dependents. Marital status is determined as of
receive a payment. A 2017 CBO analysis estimated that of
the last day of the calendar year. For example, if a couple is
292.6 million individuals who could be included on a
married on December 31, 2020, they are considered married
federal income tax return (as the taxpayer, spouse, or
for all of 2020 for tax purposes. (There are exceptions to
dependent), 251.9 million were actually included—
this general rule.) Most married taxpayers file their returns
representing about 86% of all individuals. The study
jointly. Taxpayers with dependents may file using the head
estimated that the greatest share of non-filers were lower-
of household filing status. For most tax benefits, children
income households who are generally not required to file a
must live with the taxpayer for more than six months out of
federal income tax return.
the year to be considered a “qualifying child” (something
that may only be clear at the end of the year for some
The IRS could provide a means for families to provide this
households.) In addition to annual income and family
information (like the non-filer portal used for the stimulus
structure data, households often provide a street address and
checks). If a tool were made available, some eligible
bank account information on their tax return.
households might not use it. For example, this was the case
in October 2020, when five months after the stimulus check
Tax data generally do not include information about within-
non-filer portal was created, an estimated 9 million to 12
year fluctuations in income and family structure. This may
million eligible non-filing households had not received a
limit the ability to structure a tax benefit to respond to
check.
https://crsreports.congress.gov

link to page 1 Advancing Refundable Tax Credits: Policy Considerations
monthly or quarterly fluctuations in these factors. In other
unclear if most households experiencing changes in
words, any monthly or quarterly advance credit will not be
circumstances would update this information.
based on income and family structure in that given month
or quarter—rather, it will be based on annual measures that
ARPA Child Credit: ARPA directs the Treasury to create
are equally prorated.
a portal to allow households to modify information related
to potential advance payments of the child tax credit. It also
In addition to limitations associated with using annual data,
allows households to opt out of receiving the advance
policymakers interested in advance payments of refundable
payment.
credits may consider the lagged nature of data available to
the IRS. When advancing a refundable credit to a
Whether and How Households Would Reconcile
household, it might be useful for the IRS to have real-time
When credit amounts are advanced, it is likely that some
information about the household. However, income tax
households will receive more (or less) in advance payments
returns (which represent the IRS’s primary source of
during the year than they are eligible for when tax returns
information on households’ income and family structure)
are filed. (A system allowing individuals to report changes
provide retrospective data on the household for the previous
to the IRS might partially, but is unlikely to fully, address
year. As a result, the IRS has information on what a
this issue.) Absent specific reconciliation rules, taxpayers
household’s situation was in prior years but no information
who received more in monthly payments than they were
on what a household’s situation is in the present. For
due (overpayments) would generally have to pay back the
example, at the beginning of 2021, the IRS had generally
difference; those who received less (underpayment) would
processed 2019 income tax returns. The IRS began
receive the difference when filing their tax return.
accepting 2020 income tax returns on February 12, 2021,
Repayment may either reduce a tax refund or result in the
and taxpayers generally have until May 17, 2021 (the usual
taxpayer being required to remit payment to the IRS.
deadline is April 15) to file their 2020 returns. These
deadlines provide taxpayers with flexibility when
Reconciling estimated payments with what a household is
completing income tax returns, but also create delays in
actually eligible for ensures that households receive the
when the IRS receives the most recent tax information. If
correct amount of a credit. Reconciling may also discourage
the IRS were to require taxpayers to file tax returns earlier,
taxpayers from strategically deciding when to report
it could use more current data when administering an
information to the IRS. However, reconciliation—
advance credit. However, doing so could place additional
especially paying back an overpayment—may result in
burdens on households filing income tax returns.
additional hardship among low- and moderate-income
households. The three rounds of “stimulus checks” enacted
ARPA Child Credit: ARPA directs the Treasury to issue
in 2020 and 2021 included reconciliation rules whereby
half of the expected 2021 credit in periodic payments
taxpayers generally do not need to pay back an
beginning after July 1, 2021 (these periodic payments will
overpayment, but can claim an additional amount on their
generally be equal in amount). Taxpayers will claim the
tax return if they received less than they are eligible for. In
remaining half of the total 2021 credit when filing their
contrast, among households that receive the advance of the
2021 income tax return in early 2022. The expected 2021
health insurance premium tax credit (which is advanced
credit amount is the total amount the taxpayer would be
monthly to health insurers), 58% had an overpayment of the
expected to receive in 2021 (and not just the amount of the
advance which generally does need to be paid back,
credit that exceeds income taxes owed). The 2021 advance
although there are protections for lower-income
payment amount is estimated based on 2020 income tax
households. Prior research suggests the majority of
data or, if unavailable, 2019 income tax data; hence it may
households who repay the premium tax credit do so in the
not reflect households’ current situations in 2021. The law
form of a reduced refund.
directs Treasury to create a portal so that families can
manually update their information.
ARPA Child Credit: Under the advance payment
provision of the child credit in ARPA, if a household
Changes in Household Circumstances
received less in monthly payments than it was due, the
In the absence of real-time data on households’ situations,
household would receive the additional amount when filing
policymakers may consider whether to allow households to
its 2021 tax return. However, if the household received
proactively (i.e., manually) report changes to their income
more in monthly payments than it was due, it would
or family structure. Under this approach, the IRS or other
generally need to repay the difference. In cases where an
government agency would design a system that allows
incorrect amount of the advance payment is due to net
households to report changes in factors that may affect
changes in the number of qualifying children, up to $2,000
eligibility for refundable credits (particularly income,
per child of the advance payment is protected from
marital status, and number of qualifying children). The IRS
repayment (the “safe harbor” amount) for lower-income
could then determine a household’s advance payment using
taxpayers. This safe harbor amount gradually phases down
this more up-to-date data. In other words, if a household’s
as income increases.
situation changed, it could alert the IRS to the change and
receive an adjusted advance payment that more accurately
Margot L. Crandall-Hollick, Acting Section Research
reflects its current situation and eligibility. One potential
Manager
model for this sort of system is the non-filer portal the IRS
Conor F. Boyle, Analyst in Social Policy
created to administer stimulus checks. As previously
discussed (see “Lack of Data on Eligible Households”), it is
IF11811
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Advancing Refundable Tax Credits: Policy Considerations

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https://crsreports.congress.gov | IF11811 · VERSION 1 · NEW