Child tax credit (United States)
The United States federal child tax credit (CTC) is a partially-refundable[a] tax credit for parents with dependent children. It provides $2,000 in tax relief per qualifying child, with up to $1,400 of that refundable (subject to a refundability threshold, phase-in and phase-out[b]). In 2021, following the passage of the American Rescue Plan Act of 2021, it was temporarily raised to $3,600 per child under the age of 6 and $3,000 per child between the ages of 6 and 17; it was also made fully-refundable[c] and half was paid out as monthly benefits. This reverted back to the previous in 2022. The CTC is scheduled to revert to a $1,000 credit after 2025.
The CTC was estimated to have lifted about 3 million children out of poverty in 2016.[2] In 2021, a Columbia University study estimated that the expansion of the CTC in the American Rescue Plan Act reduced child poverty by an additional 26%, and would have decreased child poverty by an additional 40% had all eligible households claimed the credit.[3] The expansion also substantially reduced food insufficiency.[4][5][6] Research indicates that cash transfers to families, like the refundable portion of the CTC, leads to improved math and reading test scores, a higher likelihood of high school graduation, higher college attendance, and long-term increases in income for both parents and children.[7][8] Studies have also determined that the CTC increases labor force participation among low-income parents.[9][10]
The CTC was created in 1997 as part of the Taxpayer Relief Act of 1997. Initially a small $500 per child nonrefundable credit, it was progressively made larger and extended to more taxpayers through subsequent legislation. In particular, it was temporarily raised to $1,000 per child and made refundable, subject to a phase-in, by the Jobs and Growth Tax Relief Reconciliation Act of 2003; that raise was made permanent by the American Taxpayer Relief Act of 2012; the credit was temporarily raised to $2,000 per child, with up to $1,400 of that refundable, and the number of taxpayers eligible substantially expanded by the Tax Cuts and Jobs Act of 2017; and finally the credit was expanded substantially and made fully available to very low-income people for one year by the American Rescue Plan Act of 2021.
Background[edit]
A tax credit enables taxpayers to subtract the amount of the credit from their tax liability.[d] In the United States, to calculate taxes owed, a taxpayer first subtracts certain "adjustments" (a particular set of deductions like contributions to certain retirement accounts and student loan interest payments) from their gross income (the sum of all their wages, interest, capital gains or loss, business income, IRA and pension income, Social Security income, rents, royalties, and unemployment compensation) to determine their adjusted gross income (AGI). They then subtract from their AGI the larger of the standard deduction or itemized deductions, as well as the deduction for qualified business income, to determine their taxable income. They then apply the relevant tax rates to their taxable income (See How do federal income tax rates work? for more information on income tax brackets). Finally, they subtract any tax credits they are eligible for from their tax liability to determine the amount of tax that they owe. This is summarized by the equation below:
There are two basic types of tax credits: non-refundable tax credits and refundable tax credits. A tax credit is non-refundable if the credit can only be used to reduce tax owed to $0. It is refundable if it can be used to produce a negative tax liability, which will be refunded to them, i.e. they will receive a tax refund that is larger than any taxes they have already paid. For example, if a taxpayer with a tax liability before tax credits of $500 were eligible for a $2,000 refundable tax credit, they would receive a tax refund that is $1,500 larger than any taxes they have already paid. If the $2,000 credit was non-refundable, by contrast, they would only be able to reduce their taxes owed to $0 and would not receive a refund for the remaining $1,500 of the credit.
Eligibility[edit]
The child tax credit is available to taxpayers who have a "qualifying child." A person is a "qualifying child" if they are under the age of 17 (or, in 2021, under the age of 18) at the end of the taxable year and meets the requirements of 26 U.S.C. Sec. 152(c). In general, a qualifying child is any individual for whom the taxpayer can claim a dependency exemption and who is the taxpayer's son or daughter (or descendant of either), stepson or stepdaughter (or descendant of either), or eligible foster child. For unmarried couples or married couples filing separately, a qualifying child will be treated as such for the purpose of the CTC for the taxpayer who is the child's parent, or if not a parent, the taxpayer with the highest adjusted gross income (AGI) for the taxable year in accordance with 26 U.S.C. Sec. 152(c)(4)(A).
The Tax Cuts and Jobs Act of 2017 restricted the credit to only those dependent children possessing a Social Security Number (SSN); previously, dependents who did not possess a SSN because of their immigration status could still be eligible for the credit using an Individual Taxpayer Identification Number (ITIN).[18]
To receive the credit as a refund there are income requirements, see Overview.
Effects[edit]
The child tax credit—especially the fully-refundable 2021 expanded child tax credit—significantly reduces child poverty.[3] According to the Center on Budget and Policy Priorities, in 2018 the CTC, in conjunction with the earned income tax credit (EITC), lifted 5.5 million children above the poverty line.[19] A 2021 Columbia University study estimated that the expansion of the CTC instituted by the American Rescue Plan Act reduced child poverty by an additional 26%, and would have decreased child poverty by 40% had all eligible households claimed the credit;[20] the same group found that in the first month after the expansion of the CTC expired, child poverty rose from 12.1% to 17%, a 41% increase representing 3.7 million children.[21] Additionally, changes to official poverty statistics understate the poverty alleviation effects of the child tax credit: the CTC does not raise the incomes of many poor families above the poverty line—and thus they do not appear in poverty reduction statistics—even though CTC benefits provide these families with substantial boosts in income.[22]
Research indicates that income from the CTC and EITC leads to improved educational outcomes for young children in low-income households and is associated with decreased child behavioral problems and significant increases in college attendance among high school seniors in low-income families.[7][23] Studies on the 2021 expanded CTC determined that the additional benefits decreased food insufficiency by about 25%.[4][5][6][f] Evidence on cash transfers, like the refundable portion of the CTC, shows that children in families receiving them have improved math and reading test scores, a higher likelihood of high school graduation, and a 1–2% increase in earnings in adulthood;[8] they also lead to "persistent" increases in parents' earned income.[8] Evidence on the earned income tax credit and cash transfer programs in other countries also indicates that cash benefits reduce the rate of violent crime.[25][26][27][28][29]
Two surveys of people who claimed the 2021 expanded child tax credit, one by the United States Census Bureau and another by the University of Michigan in collaboration with Propel, a technology firm, found that most families used the monthly CTC payments to pay for basic needs like food, rent, school supplies, utilities, and clothing, as well as to reduce personal debt.[30][31][32] A survey by the American Enterprise Institute determined that lower income families were most likely to spend the benefit while higher-income families were most likely to save it.[33]
A study of the labor effects of the CTC from 2001 to 2016, which included a phase-in, determined that the CTC increased labor force participation by 9.6 percentage points among low-income parents of older children.[9] While some economic models predicted that the 2021 expansion of the CTC, which increased the credit value and eliminated the phase-in, would lead to modest negative employment effects relative to the prior CTC (while still having substantial anti-poverty effects),[34][35] empirical research has indicated that, in the six month period that monthly CTC payments were distributed, effects on employment and labor force participation were minimal.[36][37]
History[edit]
Origins[edit]
The child tax credit was created in 1997 as part of the Taxpayer Relief Act of 1997.[38] Initially it was a $500-per-child (up to age 16) nonrefundable credit intended to provide tax relief to middle- and upper-middle-income families. The credit phased out for higher earners at a rate of $50 for every $1,000 in additional income over $110,000 for taxpayers filing as married joint, $75,000 for taxpayers filing as head of household, and $55,000 for taxpayers filing as married separate. While non-refundable for most families, it was refundable for families with more than three children (reduced by the amount of the taxpayer’s alternative minimum tax). The credit was not indexed for inflation.
Criticism[edit]
Lower benefits for low-income people[edit]
The child tax credit has been criticized for excluding low income-families—who are in most desperate need of financial assistance and who reap the largest relative gain in income from the benefit—from obtaining the full benefit or even any of the benefit.[66][67][68][69] Under the current CTC, very low-income families making less than $2,500 receive no benefit and low-income families with incomes above $2,500 are subjected to a 15% phase-in. As a result, about one-in-five families with eligible children have incomes too low to receive the full credit.[13] Furthermore, according to Columbia University's Center on Poverty and Social Policy, over 50% of black and Hispanic children are in families with incomes too low to receive the full benefit and nearly 1-in-5 black children are in families with incomes too low to receive any of the credit.[70]
Excluding the poorest families from the full benefit substantially reduces the poverty alleviation effects of the CTC: the Jain Family Institute, for instance, estimates that making the child tax credit fully refundable—without any change to benefit levels—would reduce child poverty by 19%.[22]