Taxation and the Family: What is the child tax credit?
Taxpayers can claim a child tax credit (CTC) of up to $1,000 per child under age 17. The credit is reduced by 5 percent of adjusted gross income over $110,000 for married couples ($75,000 for single parents). If the credit exceeds taxes owed, taxpayers can receive some or all of the balance as a refund, known as the additional child tax credit (ACTC) or refundable CTC. The ACTC is limited to 15 percent of earnings above a threshold that is indexed for inflation, $12,050 in 2008. Because the income range over which the ACTC phases in overlaps at least part of the range over which the earned income tax credit (EITC) phases out, the CTC partly offsets the high marginal tax rates associated with that phase-out.
The CTC is the largest tax code provision benefiting families with children, distributing about $45 billion to 31 million families in 2007. The credit disproportionately benefits higher-income families, because of the ACTC earnings threshold: nearly 60 percent of its benefits in 2005 went to families in the top 40 percent of the income distribution, and less than 1 percent went to those in the lowest income quintile. And although nearly every family with an eligible child in the third and fourth income quintiles (annual incomes between $27,000 and $84,000) benefits from the CTC, fewer than 10 percent of families with an eligible child in the lowest income quintile (income less than $14,000) benefits.
- The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) doubled the CTC from $500 to $1,000 per child and made it refundable for more families. Unless Congress acts to renew it, the CTC will revert to $500 per child when EGTRRA sunsets in 2011, and the credit will no longer be refundable for many families.
- The CTC credit is not indexed for inflation, and so its value erodes each year. The only credit parameter indexed to inflation is the threshold over which families can receive a refundable credit. Thus families must earn more each year to receive the same refundable credit. This affects families who do not have enough tax liability to get the entire $1,000 per child credit.
- Of children in families with working parents, 27 percent live in families who receive less than the full credit because parental earnings are too low to qualify for the full credit. Forty percent of these children live in families receiving no credit at all because their earnings fall below the level at which the credit becomes available.
- Possible reforms of the CTC would make the credit permanent (even if the other EGTRRA provisions are not); index its value and the phase-out thresholds; index the maximum CTC to inflation but limit it to taxpayers who obtain health insurance for their children; or lower the refundability threshold below $12,050, perhaps to zero, so that all families, especially low-income and minority families, can receive the credit.
