Tuesday, April 2, 2013
Margot L. Crandall-Hollick
Analyst in Public Finance
This report provides background information on the child tax credit. Specifically, this 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. (This $3,000 amount is referred to as the “refundability threshold”.) 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 dollar for dollar of the value of the credit. 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 as a result of 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. Specifically EGTRRA doubled the value of the credit per child (from $500 to $1,000) and made the credit refundable for families with earnings over $10,000. ARRA lowered this refundability threshold from $10,000 (adjusted annually for inflation) to $3,000 (not adjusted for inflation). As a result of these changes, certain low-income taxpayers are currently eligible for the tax credit if their earnings are greater than $3,000. They receive 15 cents of credit for every dollar of earnings above $3,000 up to the maximum value of the credit—$1,000/per child.
The changes made by EGTRRA and ARRA 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 2012, the EGTRRA changes to the child tax credit were made permanent, while the ARRA changes were extended for five years (through the end of 2017) as part of the American Taxpayer Relief Act (P.L. 112-240; ATRA). Hence, under current law, beginning in 2018, the child tax credit will still be worth $1,000 per child credit, but the refundability threshold will increase from $3,000 (not adjusted for inflation) to $10,000 (adjusted for inflation occurring after 2001).
Date of Report: March 25, 2013
Number of Pages: 14
Order Number: R41873
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