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The child tax credit (CTC) is a measure administered though the tax code that is designed to make raising children more affordable by easing the financial burden faced by families. The CTC is what is known as a tax expenditure, and it takes the form of a per-child credit for families. It works by reducing a taxpayer’s tax liability, meaning that it reduces the amount of taxes owed. It is also partially refundable, so if a taxpayer’s liability is smaller than their tax credit, that taxpayer may receive part or all of the difference. The refundable portion of the tax credit is called the additional child tax credit.
The CTC was created in 1997, and lawmakers have made changes to it over the years. In 2001, legislation increased the amount of the credit and made it partially refundable. The Tax Cuts and Jobs Act (TCJA) of 2017 made certain elements of the credit more generous, including doubling the maximum credit and increasing the amount of income at which the credit begins to phase out.
In 2019, the credit cost $118 billion — which is to say it resulted in $118 billion less coming into the federal government in the form of revenues. The Tax Policy Center estimates that 91 percent of families with children received the CTC in 2018, the most recent year for which data are available. That translates to approximately 34 million families.
The CTC is available to families with children under the age of 17, as well as (on a limited basis) families with adult dependents. Broadly speaking, a taxpayer’s income determines eligibility for the credit — taxpayers receive a credit equal to a percentage of their earnings, up to a maximum amount of $2,000 per qualifying child under the age of 17.
The credit begins to phase out at $200,000 for single taxpayers and $400,000 for married couples. Of the $2,000 maximum credit per child, up to $1,400 is refundable.
Families with children who are not citizens and adult dependents may be eligible for a non-refundable credit of $500.
The design and effects of the CTC are often considered alongside the Earned Income Tax Credit, a credit that is was designed to address poverty and also has significant impact on children. Unlike the EITC, CTC benefits accrue to those at the middle and high end of the income distribution. Three quarters of families with the lowest incomes qualify for the credit, while 98 percent of families in the middle of the income distribution qualify. Furthermore, families with lower incomes receive lower benefits than those with higher incomes because they do not earn enough to qualify for the full credit.
A recent study by researchers at Columbia University found that 23 million children do not generate the full tax credit under the current structure of the CTC. Of those children, 50 percent are Black non-Hispanic and Hispanic, and 70 percent are the children of single parents who are female.
While most of the CTC’s benefits flow to higher-income families, it remains a significant tool for reducing child poverty. The CTC lifted about 4.3 million people out of poverty in 2018, including about 2.3 million children, according to research by the Center on Budget and Policy Priorities.
The EITC and CTC are the second and third largest programs, after Medicaid, that benefit children, and taken together they reduce child poverty by nearly 20 percent.
While the Child Tax Credit is a relatively new program and hasn’t yet been the subject of significant amounts of research, evidence suggests that the additional income that it provides though tax credits and the refundable additional child tax credit has many of the same secondary effects as the EITC, including improving school performance and improving health outcomes.
The CTC cost $118 billion in 2019, and is among the largest tax expenditures. Nevertheless, it is relatively small in comparison to total tax expenditures, which have a budgetary cost of $1.5 trillion.
Proposed reforms to the CTC generally center on making the credit available to more low-income families as well as making it more generous. Proposed reforms include:
The CTC is a powerful and popular tool that provides assistance to families with children, and while it represents a small part of overall spending, it is one of the largest tax expenditures.