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 to inflation; starting in 2011, the threshold was temporarily reduced to $3,000. The American Taxpayer Relief Act of 2012 extended the temporary reduction through 2017. For families with at least three children, 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. For these families, 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. TPC projects that 38 million families will claim credits totaling about $58 billion in 2013. (Urban-Brookings Tax Policy Center Microsimulation Model, version 0412-8) The temporary reduction of the ACTC earnings’ threshold means that families in the lowest income quintile get a larger share of total benefits than under permanent law: 13 percent in 2013 compared with less than 1 percent in 2001. In 2013, TPC estimates that a little over three-quarters of benefits will go to families in the middle three quintiles and the remaining 10 percent to families in the highest income quintile.
- The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) doubled the CTC from $500 to $1,000 per child, made it refundable for more families and allowed it regardless of AMT liability. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended those temporary provisions through 2012 and the American Taxpayer Relief Act extended those temporary provisions through 2017. Barring further extension, the CTC will revert to $500 per child when the temporary provisions sunset in 2018, and many families will lose eligibility for the refundable portion of the credit.
- Before EGTRRA, only families with at least three children could receive a refundable CTC up to the Social Security and payroll taxes they paid minus their Earned Income Tax Credit.
- EGTRRA extended the refundable CTC to all families with children, setting it equal to 15 percent of earnings over a threshold that is indexed annually for inflation. Under EGTRRA, the 2013 threshold would likely exceed $13,000.
- The American Recovery and Reinvestment Tax Act of 2009 temporarily reduced the refundability threshold to $3,000 for 2009 and 2010 and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended this provision through 2012. The American Taxpayer Relief Act extended this provision through 2017.
- If Congress allows the temporary provisions to expire in 2018 as scheduled, the new form of refundability—15 percent of earnings over a threshold—will disappear and only the much more limited refundability for larger families would apply.
- The refundable CTC complicates tax filing, especially for larger families who may calculate their credit under both the EGTRRA and pre-EGTRRA rules.
- Because the CTC is not indexed for inflation, its value erodes each year. Furthermore, the only credit parameter indexed to inflation is the permanent threshold over which families may receive a refundable credit. As the nominal threshold rises, families must earn more each year to receive the same refundable credit. This situation only affects families who do not have enough tax liability to get the entire $1,000 per child credit – and has no effect when the temporarily reduced refundability threshold is in place, as it is not indexed to inflation.
- In 2011, 28 percent of children whose parents work lived in families that received less than the full credit because the parents earned too little. Five percent of these children were in families which received no credit at all because their earnings fell below the refundability threshold. The proportion of children in this situation has declined considerably after the refundability threshold was lowered in 2009.
- Possible reforms of the CTC include:
- Make the $1,000 value permanent;
- Index its value and phase-out thresholds;
- Index the maximum CTC to inflation but limit it to taxpayers who obtain health insurance for their children; or
- Permanently lower or eliminate the refundability threshold so that all working families, especially those with low income could receive the credit.
- The President's 2012 Budget proposed to make temporary provisions of the Child Tax Credit permanent: a $1,000 credit per child, refundable up to an amount equal to 15 percent of income earned in excess of $3,000 (not indexed for inflation).