IN-DEPTH REPORT

JUNE 17, 2021

The new Child Tax Credit has the potential to be life-changing, but some Providers users might miss out.

That would be life changing. The money I spend out of pocket on groceries after my food stamps runs out could go towards bills, car maintenance, or maybe I could accumulate some savings. 

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Starting on July 15, families will begin to receive payments of up to $300 per child under 6 and $250 per child 6 to 18. This expansion of the Child Tax Credit, included in the American Rescue Plan, is groundbreaking--it expands the amount of the Child Tax Credit and eliminates the earned income requirement to receive it. Its delivery is also unique: the new Child Tax Credit will provide half the total credit in advance monthly payments from July to December 2021, and deliver the second half via tax returns next year. 

 

The Child Tax Credit will be a lifeline to low-income families with children after a year of incredible hardship. If it were to be made permanent, the Child Tax Credit would be life-changing. However, we estimate that millions of children in Providers households are at risk of not receiving those monthly payments starting in July. 

Many Low-Income Families Do Not File Taxes

It would change our situation, our lives. I know it doesn't seem like much money but it would ease so many burdens.

The Child Tax Credit will be distributed via the tax system. However, many low-income families do not regularly file taxes because they do not earn enough income to be required to do so. For the many Providers households that do not work or earn little income, tax filing is generally perceived as high-risk, low-reward. The fear of audits and penalties looms large, and low-income families have a general understanding that you can only get money back if you’ve worked. Thus Providers households generally do not file taxes unless they are required to do so. 68% of Providers users with children under 18 are regular filers; 18% say they sometimes file taxes; and 14% do not file.

Providers users with children under 18

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regularly file tax return

sometimes file tax return

do not file (nonfiler)

Who is a “nonfiler”

 

We asked over 2,000 Providers users “Do you file taxes every year?” 23% said “no”. However, 27% of those who answered “no” filed taxes at least once in the last 5 years, with the highest portion, 8.7% saying they filed in 2020. In qualitative interviews, identifying as a nonfiler seemed to be a static label, even if a person did file taxes from time to time.

The Internal Revenue Service (IRS) will use 2020 tax filing data to distribute the Child Tax Credit starting in July. But as many as 26% of Providers households with children under 18 didn’t file 2020 taxes. The IRS has recently announced that it will also rely on 2019 tax filing data to distribute the credit but tax filing rates were about the same for 2019--24% of Providers households with children under 18 didn’t file 2019 taxes.   

The Stimulus Payments Encouraged More Families to File in 2020

Facing cut wages and few and far-between infusions of government assistance, Providers users relied on savings and their personal networks to get by. Month after month we asked users if they had borrowed money or used credit to cover expenses in the past 30 days. Providers users borrowed at high rates throughout the pandemic, but Black households resorted to it at much higher levels. On average, 60% of Black Providers users report borrowing in the past 30 days, while only 53% of white users said the same.

In April 2021, we asked Providers users for the first time how much debt they were carrying, one year into the pandemic. A stunning 37% of Providers users owe back rent or mortgage. However, Black and Latinx Providers users are more likely to--45% of Black and Latinx users owe back rent or mortgage, while 31% of white users do. Black and Latinx users were also more reliant on borrowing from family and friends--55% Latinx and 53% of Black Providers users report owing family and friends money compared to 46% of white users. 

I would no longer have to worry if my kids have enough food. Some days they want seconds and I have to tell them I am so sorry I didn’t make any extra. Not because I don’t want to because all I have is on the table for dinner.

The cost-benefit analysis around tax filing changed in 2021 because of the three stimulus payments (Economic Impact Payments) distributed in the past year. Those who did not get all stimulus payments or received partial payments had to file taxes in 2020 to receive them--and our research suggests that many did. 35% of those who filed this year did not file last year.

 

While this is an encouraging sign, every household will need to file taxes again next year to receive the second half of the Child Tax Credit, and low-income families face numerous challenges to filing taxes. In interviews with Providers users who did not regularly file taxes, families described being caught in a lose-lose situation: paying a very high fee for tax preparation or facing the stressful and confusing process of filing their own taxes. Moreover, tax preparation software hasn’t been designed for households with low or no income, leading to even more stress or inability to complete filing. 

 

However, the stimulus payments also led to the creation of a valuable tool for low-income families--the nonfiler portal. This tool--which allowed individuals to file a simplified tax form at no cost online from April to November 2020--gave those who had not filed 2019 taxes a chance to share their information with the IRS in order to receive the first stimulus payment. 

 

While many Providers users found the nonfiler form to be simple, easy to use, and helpful, 23% of those with children under 18 said they were not able to successfully update their information with the IRS through the nonfiler portal.

Few Providers Families Have Direct Deposit Information on File with the IRS

I’d be able to afford rent for the first time since being a mother.

One of the revolutionary aspects of the expanded Child Tax Credit is that it will be partially delivered in advance, on a monthly basis.

In order for the monthly payments to reach families in a timely and predictable manner, they must have accurate direct deposit information on file with the IRS. 

 

Beyond the many families who have not filed taxes in the past two years, many Providers users who have filed taxes do not have direct deposit information on file. 18% of users with children under 18 received their 2020 tax refund by prepaid card or check.

 

Even if households do have direct deposit information on file, many Providers households need or want to change that information. One in five Providers households said they have opened a new primary banking account in the past year, and one in three said they would want to receive the credit in a different place than where they received their tax refund. 

Over 80% listed "ability to see and change where the Child Tax Credit is deposited" as a key feature of any CTC related tool (a close second to help filing taxes).

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Considering all these factors--nonfilers, those who have not shared direct deposit information with the IRS or need to update it--we estimate that 52% of Providers users must take some additional action to begin receiving the Child Tax Credit monthly payments via direct deposit in July. 

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