Key Elements of the U.S. Tax System

HOW THE CHILD TAX CREDIT WORKS TODAY

Taxpayers can claim a child tax credit (CTC) of up to $2,000 for each child under age 17 who is a citizen. The credit is reduced by 5 percent of adjusted gross income over $200,000 for single parents ($400,000 for married couples). If the credit exceeds taxes owed, taxpayers can receive up to $1,400 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 $2,500 (figure 1).

For the most part, the CTC is not indexed for inflation. The exception to this is the amount of the credit families with children under 17 can receive as a refund. This amount (which was set at $1,400 in 2018) will increase annually with inflation until it becomes equal to the full value of the credit ($2,000). In 2020, the refundable portion of the credit remains at $1,400. Inflation has been insufficient to bump the refundable portion up to $1,500, the lowest increment allowed, by law.

Starting in 2018, a $500 credit was made available to dependents who were not eligible for the $2,000 CTC for children under 17 (figure 1). Before 2018, these individuals would not have qualified for a tax credit but would have qualified for a dependent exemption, which was eliminated by the 2017 Tax Cuts and Jobs Act (TCJA). Dependents eligible for this credit include children ages 17–18 or those 19–24 and in school full time in at least five months of the year. Also included are older dependents—representing about 6 percent of dependents eligible for the CTC.

After 2025, the CTC is scheduled to revert to its pre-TCJA form. At that point, taxpayers will be able to claim a credit of up to $1,000 for each child under age 17 and the credit will be reduced by 5 percent of adjusted gross income over $75,000 ($110,000 for married couples). If the credit exceeds taxes owed, taxpayers will be able to receive the balance as a refund (the ACTC). The ACTC will be limited to 15 percent of earnings above $3,000.

IMPACT OF THE CTC

The Tax Policy Center estimates that 90 percent of families with children will receive an average CTC of $2,380 in 2020 (the average credit can exceed the maximum per child credit because families can have more than one child). Families with children in all income groups will benefit from the CTC, but families in the lowest income quintile are least likely to benefit from the credit because more of them will not have sufficient earnings to qualify for the credit. Just under three-quarters of families in the lowest income quintile (the bottom one-fifth of the income distribution, ranked by household income) will be eligible for a CTC, receiving an average benefit of $1,280. The average credit is the smallest for this group because low-income families are most likely to be limited to the refundable portion of the credit, which is capped at $1,400 rather than the full $2,000 limit for the nonrefundable credit (figure 2).

The percentage of families with children receiving the credit and the average credit received are higher among moderate- and middle-income families. Almost 94 percent of families with children in the second income quintile will receive a CTC as will almost all families in the third and fourth income quintiles (98 and 99 percent, respectively). The proportion of families with children receiving a credit drops to 88 percent in the highest income group because of the income limits (figure 2).

The CTC has a significant impact on the economic well-being of low-income families with children. If the official estimate of poverty counted the CTC as income (including the refundable portion), 4.3 million fewer people would have fallen below the federal poverty line in 2018, including about 2.3 million children. Counting the credit would have also reduced the severity of poverty for an additional 12 million people, including 5.8 million children (Center on Budget and Policy Priorities 2019).

RECENT HISTORY OF THE CTC

In 2018, the Tax Cuts and Jobs Act doubled the CTC for children under 17 from $1,000 per child to $2,000 per child. The legislation specified in 2018 that up to $1,400 of the credit could be received as a refundable credit. The refundable amount is indexed to inflation but inflation has not increased enough to trigger the minimum increase. Only children who are US citizens may receive this credit. The legislation also allows dependents who do not qualify for the $2,000 credit to qualify for a nonrefundable credit worth up to $500. The legislation is temporary and expires after 2025. At that point, the credit for children under 17 will revert to $1,000 per child, and other dependents will no longer be eligible for a CTC.

Before these changes, the American Taxpayer Relief Act of 2012 had 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 TCJA further reduced the refundability threshold to $2,500 starting in 2018, but that lower threshold will expire after 2025 when the $3,000 refundability threshold will return.

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.

Updated May 2020