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Wednesday, June 22, 2011

The Child Tax Credit: Current Law and Legislative History

Margot L. Crandall-Hollick
Analyst in Public Finance

This report provides background information on the child tax credit. Specifically, the report provides an overview of the child tax credit under current law, as well as a legislative history of this tax benefit, which helps explain its purpose and current structure.

When calculating the total amount of federal income taxes owed, eligible taxpayers can reduce their federal income tax liability (the taxes due after the marginal tax rate schedule is applied to their taxable income) by the child tax credit. Currently, eligible families that claim the child tax credit can subtract up to $1,000 per qualifying child from their federal income tax liability. The maximum amount of credit a family can receive is equal to the number of qualifying children in a family times $1,000. If a family’s tax liability is less than the value of their child tax credit, they may be eligible for a refundable credit calculated using the earned income formula. Under this formula, a family is eligible for a refund equal to 15% of their earnings in excess of $3,000, up to the maximum amount of the credit. The credit phases out for single parents with income over $75,000 and married couples with income over $110,000.

The child tax credit was created in 1997 by the Taxpayer Relief Act of 1997 (P.L. 105-34) to help ease the financial burden that families incur when they have children. Like other tax credits, the child tax credit reduces tax liability on a dollar for dollar basis. Initially the child tax credit was a nonrefundable credit for most families. A nonrefundable tax credit can only reduce a taxpayer’s tax liability to zero, while a refundable tax credit can exceed a taxpayer’s tax liability, providing a cash payment to low-income taxpayers who owe little or no tax. Since it was first enacted, the child tax credit has undergone significant changes, most notably by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) which increased the availability of the credit to many low-income families by making the credit partially refundable. The changes made by these laws were extended through the end of 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). At the end of the 112th Congress, the child tax credit will revert to a $500 per child credit that is nonrefundable for most families if no further extensions occur.

Date of Report: June 17, 2011
Number of Pages: 15
Order Number: R41873
Price: $29.95

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