What is the child tax credit?
The child tax credit (CTC) provides a credit of up to $1,000 per child under age 17. If the CTC exceeds taxes owed, families may receive some or all of the credit as a refund, known as the additional child tax credit (ACTC) or refundable CTC.
How the CTC Works Today
Taxpayers can claim a tax credit of up to $1,000 for each child under age 17. The credit is reduced by 5 percent of adjusted gross income over $75,000 for single parents ($110,000 for married couples). 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 $3,000.
Impact of the CTC
Families in all income groups benefit from the CTC. However, the percentage of families receiving the credit and the average credit received is higher among moderate- and middle-income families. In 2016, 70 percent of families with children will receive an average CTC of $1,060. About 90 percent of families with children in the second and third income quintiles receive CTC benefits (each quintile contains 20 percent of the population ranked by household income). The proportion of families with children receiving a credit drops to 80 percent in the fourth quintile, while only 7 percent of families with children in the highest income quintile receive the credit (figure 2).
If the CTC (including the refundable portion) were counted in the official estimate of poverty, 2.8 million fewer people would fall below the poverty threshold in 2015, including about 1.6 million children. Counting the credit would have also reduced the severity of poverty for an additional 13.3 million people, including 6.6 million children (Center on Budget and Policy Priorities 2016).
Recent history of credit
The American Taxpayer Relief Act of 2012 (ATRA) permanently increased the CTC from $500 per child, its pre-2001 level, to $1,000 per child. It also temporarily extended the provisions of the American Recovery and Reinvestment Act of 2009 (the anti-recession stimulus package) that reduced the earnings threshold for the refundable CTC from $10,000 (adjusted for inflation starting after 2002) to $3,000 (not adjusted for inflation). The Bipartisan Budget Act of 2015 made the $3,000 refundability threshold permanent.
The refundable CTC was originally designed in 2001 to coordinate with the earned income tax credit (EITC). Once earnings reached $10,020 for families with two children in 2001, there was no further increase in the EITC. The earnings threshold for the refundable CTC was set at $10,000 so families could now receive a subsidy for earnings in excess of that amount. Like the earned income amount for the EITC, the $10,000 earnings threshold was indexed for inflation. When the earnings threshold for the refundable CTC was reduced—first to $8,500 in 2008 and then to $3,000 in 2009—that link between the phase in of the refundable CTC and the EITC was broken.
Urban-Brookings Tax Policy Center. Microsimulation Model, version 0516-1.
Center on Budget and Policy Priorities. 2016. “Policy Basics: The Child Tax Credit.” October 21.
Maag, Elaine. 2016. “Reforming the Child Tax Credit: An Update.” Tax Policy Center. Washington, DC: Urban Institute. October 19.
Maag, Elaine. 2013. “Child-Related Benefits in the Federal Income Tax.” Low-Income Working Families Brief 27. Washington, DC: Urban Institute.
Maag, Elaine, and Lydia Austin. 2014. “Implications for Changing the Child Tax Credit Refundability Threshold.” Tax Notes, July 24.
Maag, Elaine, Stephanie Rennane, and C. Eugene Steuerle. 2011. “A Reference Manual for Child Tax Benefits.” Discussion Paper 32. Washington, DC: Urban-Brookings Tax Policy Center.
Maag, Elaine. 2015. “Reforming the Child Tax Tax Credit: How Different Proposals Change Who Benefits.” Low-Income Working Families. Washington, DC: Urban Institute.