Proven and Effective: Tax Credits to Lift Up Virginia Families

Most of us want to make sure our families and children have what they need to be healthy and reach their full potential. Yet even with slowing inflation, the costs to provide the basics remain high, putting a barrier between our families and the opportunity to thrive. Refundable tax credits provide families flexible funds to meet their unique needs, which is especially critical during tough economic times. For years, refundable tax credits like the federal Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) have been celebrated and proven tools for boosting families, making our tax code more fair, and reducing poverty, with positive impacts for communities of color in particular. In 2021, federal lawmakers recognized the power of tax credits and improved several refundable credits, including the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC), through the American Rescue Plan Act (ARPA). 

These improvements meant more Virginia families, as well as other families across the country, could access the refundable credits, according to new IRS data released this year. In Virginia, the share of families accessing the refundable Child Tax Credit more than doubled from 10.2% of returns for 2020 to 23.5% of returns for 2021. Virginia families were also able to access larger amounts of the CTC as a result of credit improvements. The average family credit amount increased by nearly $1,200 from 2020 to 2021. More families were able to access the federal EITC as well, with 18.3% of filers claiming the credit for their 2021 returns, up from 13.9% for 2020. There was a particular increase in the share of families making less than $25,000 who claimed the credit, highlighting the benefits of targeting policy choices to families who need it most. However, the expansions that helped increase access to federal credits have since ended.

Federal lawmakers should take action to strengthen refundable credits as the federal tax debate heightens with provisions of the Tax Cuts and Jobs Act (TCJA) set to expire in 2025. State lawmakers should continue to build upon the new state refundable EITC option and establish a state-level CTC to make sure more Virginia families have access to and can benefit more from refundable tax credits that help meet their unique needs.

Improvements to the CTC: In 2021, ARPA made significant improvements to the federal CTC that made it more accessible and impactful. The age limit was increased from 16 to 17, the credit was made available to families with the lowest incomes through full refundability, and the credit amount was increased for low- and moderate-income families, with an additional boost for young children. In addition, the credit was made available as a periodic payment for the second half of 2021, so families could receive the credit in monthly installments. These changes made a huge impact for families. Nationwide, these choices, combined with other policy choices, cut the child poverty rate by nearly half. Unfortunately, these critical improvements expired in 2022, contributing to a near reversal of the impact on child poverty, with the rate more than doubling from 2021 to 2022. 

2021 CTC expansion in Virginia by the numbers: More Virginia families were able to access the federal CTC for the2021 tax year and receive higher credit amounts than in previous years, according to 2021 tax return data that the IRS released in 2024. For 2021, 967,000 Virginia families, 23.5% of all tax filers in the state filing a federal return, were able to claim the refundable Child Tax Credit. This is far more than in previous years, as the credit was made more accessible to families with low incomes, and allowed qualifying families to access their full credit regardless of income tax liability through complete refundability. Less than half as many families (432,790) claimed the refundable CTC for 2020, just 10.2% of filers in total. With a larger credit amount available to families, the average $2,935 credit Virginia families received for the 2021 tax year was much larger than the average $1,739 credit a Virginia family received for 2020.

Further CTC action needed: With the expiration of federal CTC improvements, an estimated 368,000 children under 17 in Virginia and their families are unable to access the full $2,000 credit the federal government offers, according to a 2022 analysis from the Center on Budget Policy Priorities. Over half (198,000) of the children in families without access are Black or Latino. This past year, federal lawmakers made some progress on a bipartisan compromise to expand the federal CTC, but the effort was blocked in the Senate in early August 2024. With a tax debate set to happen around the expiration of key provisions of the Trump-era cuts (the 2017 Tax Cuts and Jobs Act, or TCJA), lawmakers once again have an opportunity to look to proven solutions that provide meaningful support to low- and moderate-income families like the improved CTC. 

State policymakers also have an opportunity to act by creating a refundable state-level Child Tax Credit, as 11 other states have done as of May 2024. In recent years, Virginia lawmakers have considered legislation to establish a Commonwealth Kids Credit (a state-level CTC). The 2024 proposal would give a $500 refundable tax credit per child under the age of 18 to families making less than $100,000 adjusted gross income in Virginia and would reach over 1 million children in more than 640,000 families in the state.

Improvements to the EITC: ARPA also made notable improvements to the federal EITC. The bill expanded access for workers without qualifying children, in particular, by increasing the rate at which the credit phased in, increasing the credit amount, and increasing the amount of income families without qualifying children can have before the credit phases out. In addition, lawmakers reduced the age limit from 25 to 24 for students and down to 18 for foster children and youth who are experiencing homelessness. The bill also eliminated the age limit for workers 65 and older. As a result, not only could some families access more of the credit, but others gained access where they were previously excluded. 

2021 federal EITC expansion in Virginia by the numbers: The 2021 improvements meant more families in Virginia were able to benefit from the federal EITC. For 2021, 752,060 families in Virginia filed income tax returns that claimed the federal EITC — 160,930 more than in the previous year. In total, 18.3% of households filing returns were able to access the EITC, 4.4 percentage points higher than the previous year. The federal improvements to the EITC meant increased access for lower-income households in particular. The share of Virginia families making less than $25,000 claiming the EITC increased from 28.5% of families filing returns for 2020 to 47.1% for 2021. 

Further EITC action needed: Like with the CTC, federal lawmakers can champion the protection and expansion of the EITC when considering how to move forward from the TCJA. Virginia’s state lawmakers can also consider improvements to the state-level EITC and continue down a path of creating a more fair tax code. In 2021, the Commission to Examine Racial Inequity in Virginia Law recommended a refundable state EITC to address racial inequity in the state tax code. In 2022, lawmakers improved the state EITC by adding a refundable option for the first time, equivalent to 15% of the federal EITC amount a family qualifies for. While the state offers a 20% nonrefundable EITC, many families benefit more from the smaller refundable option since it can exceed their income tax liability. 

Lawmakers can improve the state EITC by increasing the refundable option to 20%, putting more money in the pockets of low income households. A larger credit also boosts positive education and health outcomes associated with the EITC. In addition, the state EITC can be improved to include filers who use Individual Tax Identification Numbers (ITINs) rather than Social Security Numbers (SSNs) to file their taxes. Currently, ITIN filers are unable to receive the state EITC even if they meet the income eligibility requirements.

The good news is that we know that refundable tax credits are powerful tools with a proven track record of helping families. Virginia families from Alexandria to Norfolk to Roanoke benefit from refundable credits and saw increased access due to the federal expansions of the EITC and CTC in 2021. However, federal improvements to these key credits have since expired. While there has been some improvement with the adoption of the refundable state EITC option in 2022, more can be done at the federal and state level to make sure these programs reach more families. State and federal lawmakers should take action to expand refundable credits to more families and provide them with greater support.

Category:
Economic Opportunity