Understanding Yearly Changes in Family Structure and Income and Their Impact on Tax Credits

Benefits from the earned income tax credit (EITC) and child tax credit (CTC) play an important role in the financial lives of low- and moderate-income families. Determining how much credit a family qualifies for can be complicated, depending primarily on the number of eligible children, income, and marital status of the tax unit. For a growing share of families with children, these factors change throughout the year and from one year to the next—sometimes in ways that are unpredictable. Among low-income households interviewed in two consecutive years for the Current Population Survey (CPS), we find:

• 39 percent saw their EITC drop by at least $500.
• About 20 percent of low-income families saw their CTC drop by at least $500.
• Hispanic families with low-income were more likely to see a reduction in their EITC and CTC from one year to the next than non-Hispanic White families and non-Hispanic Black families.

These findings can inform efforts to advance tax credits based on prior years’ income by showing how accurate advanced tax credit payments are likely to be, what sort of protections should reasonably be put in place for people whose credits decrease, and how many people would likely need those protections.