HEROES Act Temporarily Increases Dependent Credit Generosity

Among other revenue provisions (Division B) of last week’s House-passed Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, the bill would make changes to certain refundable and non-refundable credits aimed at taxpayers with dependents under the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (EITC), Child TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Credit (CTC), and Child and Dependent Care Tax Credit (CDCTC). This post will summarize parts of the dependent-related provisions in H.R. 6800 for 2020.

Expanding the Earned Income Tax Credit (EITC)

More Generous Benefit for Childless Workers (Sec. 20121)

HEROES would increase the earned income credit for taxpayers without dependents (often referred to as the “childless EITC”) who would normally receive a much smaller maximum benefit than filers with eligible dependents. The bill increases the maximum credit for childless filers to $1,487 (up from $538), a 275 percent increase from current law.

Additionally, the legislation would increase the generosity of the credit’s refundability as filers earn income, meaning each dollar earned results in a higher amount of benefit. The phase-in percentage would be increased from 7.65 percent to 15.3 percent, the equivalent of offsetting all payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. liability for filers earning between $0 and $9,720. Further, the bill would increase the phaseout threshold from $8,650 to $11,490, meaning filers without children could take home a larger refund for each dollar earned between $8,651 and $11,489.

Finally, the bill widens the range of eligible filers. First, the bill would reduce the minimum age to claim the credit from 25 to 19 (excepting full-time students), allowing younger workers to claim the credit. Second, HEROES would raise the maximum age from 65 to 66, meaning older Americans could see an increase in their wage earnings.

Reducing Compliance Requirements for Filers with Dependents (Sec. 20122)

The Tax Cuts and Jobs Act of 2017 (P.L. 115-97) required filers to provide a valid Social Security Number (SSN) for claimed dependents in order to receive the CTC. This change brought the CTC into conformity with the already established SSN requirement in the EITC. This identification check, in part, is designed to reduce error rates in EITC payments which, in many cases, incorrectly disbursed funds to filers claiming the same dependent on separate returns.

HEROES would allow EITC eligible taxpayers to receive an EITC even if they do not provide a valid SSN for their claimed dependents.

Income Tests and Territorial Eligibility (Sec. 20124-20126)

Sections 20124 and 20126 provide flexibility for taxpayers as it relates to their investment income (20124) and adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” (20126) when determining EITC benefit eligibility. Section 20124 excludes any investment income an individual may receive for purposes of receiving the EITC. Concurrently, Section 20126 allows taxpayers in 2020 to use their 2019 adjusted gross income (AGI) if it is higher than their 2020 income in order to determine their eligible EITC benefit.

Section 20125 applies the EITC expansions to U.S. territories and possessions. Specifically, the bill instructs the U.S. Treasury Department to make payments to each territory based on their specific EITC system. Similar provisions in HEROES apply the EITC and CTC to separated filers and those in U.S. territories.

Increasing the Child Tax Credit (CTC)

Larger Refunds for Filers with Children for 2020 (Sec. 20131)

HEROES increases the CTC’s refundability and maximum credit amount. Under current law (until the end of 2025), the CTC tops out at $2,000 per child, $1,400 of which is refundable. Under HEROES, the maximum credit would temporarily increase from $2,000 to $3,000 and be fully-refundable for the 2020 tax year. It also creates a new younger child tax credit for those under 6 at $3,600. HEROES would also include 17-year-olds as eligible children for the CTC.

The provision further directs the Treasury Secretary to strive for disbursing advanced payments. This is notable for a few reasons. Historically, the CTC has not been eligible for advanced payments. The EITC was once available to filers in advanced payments, but few took advantage of it, either out of ignorance or difficulty navigating how to get them. Administratively, the bill does not elaborate on specific actions the Treasury Secretary should take in order to provide advance payments. While providing quicker relief to taxpayers is a noble goal, significant administrative hurdles remain, especially for those who have not already filed for tax year 2019.

Reforming the Child and Dependent Care Credit (CDCTC)

Boosting the Benefit for Dependent Expenses (Sec. 20141)

Currently, the CDCTC is a nonrefundable credit based on care expenses provided by an individual to children, elderly, or sick dependents. These expenses can be incurred by the taxpayer if they provide the care themselves or if the filer pays a service to provide care.. Under current law, taxpayers calculate their credit by multiplying qualifying expenses by a credit rate. The credit rate varies from 20 percent to 35 percent depending on the taxpayer’s adjusted gross income (AGI).

HEROES would amend these constraints by making the CDCTC fully-refundable for 2020 and increasing the maximum credit rate from 35 percent to 50 percent. Moreover, the credit would change the AGI phaseout threshold from $15,000 to $120,000. Furthermore, the credit doubles the amount of expenses eligible for refund to $6,000 for one dependent (up from $3,000) and $12,000 for two or more dependents (up from $6,000).

Conclusion

HEROES makes notable expansions to all three dependent-related credits, increasing maximum credit amounts, refundability, and income eligibility phaseouts. Practically, this means that certain filers could expect to receive a larger refund for each additional hour of work, eligible dependent, and dependent care expenses if the bill became law.

The Joint Committee on Taxation (JCT) estimated that the EITC, CTC, and CDCTC provisions combined would cost almost $150 billion, with the CTC changes alone accounting for $118 billion of forgone revenue. While the legislative future of H.R. 6800 remains to be seen, the increases to the EITC, CTC, and CDCTC provide another opportunity to discuss the role these credits play in the tax policy debate.

Share