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Policy Basics: The Child Tax Credit

UPDATED
August 20, 2015

Enacted in 1997 and expanded with bipartisan support since 2001, the Child Tax Credit (CTC) helps working families offset the cost of raising children.  It is worth up to $1,000 per eligible child (under age 17 at the end of the tax year). 

Taxpayers eligible for the credit subtract it from the total amount of federal income taxes they would otherwise owe.  For example, if a couple with two qualifying children would owe $4,600 in taxes without the credit, they would owe $2,600 in taxes with it, because the credit would reduce their tax bill by $1,000 for each child.

Helping Low-Income Working Families

The CTC includes a refundable component, the Additional Child Tax Credit.  This means that if the value of the CTC exceeds the amount of federal income tax a family owes, the family may receive part or all of the difference in the form of a refund check.  As a result, many working families can benefit from the credit even if their incomes are so low that they owe little or no federal income tax in a given year.  These families still pay payroll taxes, however.  

When filing taxes for 2015 (due in April 2016), working families can receive a refund equal to 15 percent of their earnings above $3,000, up to the credit’s full $1,000-per-child value.  For example, a single mother with two children who earns $14,000 in 2015 could receive 15 percent of $11,000, or $1,650, as a refund. 

This refundability feature is important for low-income working families, who otherwise wouldn’t receive the tax benefits available to higher-income families to help offset the cost of raising children.

Reducing Poverty and Expanding Children’s Opportunities

The value of the CTC increases with a household’s earnings, up to the $1,000-per-child limit.  A family that earns less than $3,000 is ineligible for the credit, however, and a family with two children that earns between $3,000 and $16,330 receives only a partial credit.

Despite these shortcomings, the CTC is a powerful weapon against poverty.  It lifted approximately 3.1 million people out of poverty, including about 1.7 million children, and lessened poverty for another 13.7 million people, including 6.8 million children in 2013.  It lifts even more families with children out of poverty when combined with the Earned Income Tax Credit (EITC) (see figure).  Many of these low-income families are ineligible for other tax-based assistance for children, like the Child and Dependent Care Tax Credit, which is not refundable.

Also, research suggests that boosting working families’ incomes can expand opportunities for children, such as by improving school performance.  Lifting low-income families’ income when a child is young not only tends to improve a child’s immediate well-being, but is associated with better health, more schooling, more hours worked, and higher earnings in adulthood, research has found.

Because higher-income households need less help to pay the costs of raising children, couples with two children and incomes above $110,000 ($75,000 for single or head-of-household filers) receive a smaller CTC, and those with incomes above $150,000 ($115,000 for singles and household heads) receive no CTC. 

Key Provision at Risk of Expiring

Unless Congress acts, a crucial provision of the CTC (along with two key provisions of the EITC) will expire at the end of 2017.  If this happens, millions of low-income working parents will lose part or all of their credit. For example, a single mother with two children who works full-time at the federal minimum wage, making $14,500 annually, will lose her entire CTC of $1,725.  Allowing the CTC and EITC provisions to expire at the end of 2017 will push 16 million people in low- and moderate-income working families, including 8 million children, into, or deeper into, poverty.

For more on the CTC and EITC, see “EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds.”