The Federal Child Tax Credit, Explained
The federal Child Tax Credit (CTC) is the primary mechanism in which the government assists parents with the costs of raising children. Yet, due to its problematic design, it leaves out many of the families that need it the most. This blog post provides a detailed summary of that design, its history, and a path towards improvement.
What is a tax credit?
The United States federal government has a complicated income tax structure that includes progressive tax rates, tax credits, and tax deductions. While deductions subtract from a household’s taxable income, a credit is simply a reduction in the amount of income taxes owed. For example, if a person’s tax liability is initially $3,000 but they earn a $1,000 tax credit, then their final tax burden is $2,000.
The Child Tax Credit is just one credit among many in our income tax code. Some states have recently included their own version of the Child Tax Credit.
Refundable vs. non-refundable tax credits
Most tax credits are non-refundable, which means that if a taxpayer’s credits exceed their tax liability, then they do not receive the difference. With a refundable tax credit, taxpayers are refunded the credit amount that exceeds their tax liability. Imagine a tax filer has a tax liability of $1,000 — if they received a non-refundable tax credit of $1,500, then their tax liability would fall to $0 but they would not receive a $500 refund. If the same taxpayer instead received a refundable tax credit of $1,500, then the government would owe them $500.
The CTC is a partially refundable tax credit. While the credit amount is $2,000 per child, only $1,500 per child is refundable in 2022.
A Brief History of the CTC
The CTC was established in 1997 under the Taxpayer Relief Act. Originally, it was a $400 non-refundable credit per child under 17. Since then, the CTC amount has changed several times, perhaps most notably in 2017 as part of the Tax Cuts and Jobs Act (TCJA). The TCJA doubled the credit from $1,000 to $2,000 per child and modified the phase-in amount to 15% of earned income over $2,500. The changes from the TCJA will expire after 2025 and without change, the credit will fall back to $1,000 per child.
The CTC was also temporarily changed under the American Rescue Plan Act of 2021 (ARPA). The benefit was increased from $2,000 per child to $3,000 per child for children over the age of five and to $3,600 for children five or younger. ARPA also removed the phase-in and sent out the credit in monthly installments to eligible families. However, the expansion expired after just five months, causing 3.7 million children to fall back into poverty.
The CTC Today
For a child to be eligible for the CTC they must meet all of the following criteria: be under the age of 17, not provide more than 50 percent of their own financial support, be a U.S. citizen, U.S. national, or U.S. resident alien, have lived with the taxpayer for more than half of the preceding calendar year, and be claimed as a dependent by the taxpayer.
Yet, having an eligible child does not guarantee a tax filer the full CTC. Eligibility for the CTC begins at $2,500 in earned income and phases in at 15 percent. The CTC also phases out for high income earners at a rate of 5 percent beginning at $200,000 for single filers and $400,000 for married filing jointly.
The chart below simulates the CTC for a single parent with three children.
How the CTC leaves out the most vulnerable
While the CTC does assist millions of families across the country, it still misses many of the families that need assistance the most for the following reasons.
CTC eligibility starts at $2,500 in income and phases in at 15%. For example, a single mother with three children would need to earn $42,500 annually to be eligible for the full-credit. To put this in perspective, someone would have to work 16 hours a day for 365 days earning the federal minimum wage to qualify.
The benefit is not fully-refundable. As discussed above, the CTC is only partially refundable. This, in combination with the phase-in, locks many families out of the full benefit. According to research at the Century Foundation, over ⅓ of children in the U.S. are ineligible for the full CTC because their families don’t earn enough to qualify. Only half of Black and Hispanic children receive the full credit. 70 percent of children living with single mothers do not receive the full credit. Younger children, who benefit the most from income support, are also more likely to be left out.
The poorest families do not file taxes. If your income is less than your standard deduction, you generally don’t need to file a return. In 2022, the standard deduction for Head of Household is $19,400 and $25,900 for married couples. Using three years of data from the Census Bureau, the Maryland Child Alliance estimates that 8 percent of Maryland children live in households that do not file income taxes (versus 6 percent nationally). The vast majority of children within this 8 percent live in poverty and are missed entirely by benefits that are conducted through the tax code.
Undocumented children are not eligible for the CTC. Children must have a Social Security number for their families to receive the CTC. Undocumented children do not have social security numbers, and thus their families cannot receive the CTC.
From tax credit, to benefit
A simple way to improve the CTC would be to make it fully refundable and eliminate the phase-in. However, this would still miss many of the most vulnerable children who live in families that do not file taxes. Thus, to ensure that all families receive the assistance, a larger overhaul is needed — the CTC should be replaced with a universal child benefit that is delivered to all families.
The Family Security Act (FSA), proposed by Senator Mitt Romney, is the closest existing legislation to a universal child benefit. The FSA eliminates a variety of redundant tax credits and establishes a $350 per month benefit per child under 6 and a $250 per month benefit for children ages 6 to 17. It also delivers the benefit through the Social Security Administration, in which every child is enrolled at birth.
While the Maryland Child Alliance has some issues with the FSA design (and amount), it would be a vast improvement over the current system. A Niskanen Center report found that the FSA would cut child poverty by roughly one third, and deep child poverty by half.
Yet, momentum for a child benefit at the federal level has completely stalled and even Romney seems to be retreating from the legislation. This places the burden on states to help families and boost children out of poverty. We urge all of our readers to advocate for a universal child benefit in their state.