Currently, the largest provision in the U.S. tax code that benefits working families with children is the Child Tax Credit (CTC). Through the CTC, eligible families can claim a credit of up to $1,000 for each child under 17 at tax time. The credit is first used to pay down taxes owed. If the CTC exceeds the amount due, taxpayers may also be eligible to receive some or all of the remainder as a refund, supplementing their wages and boosting their take home pay.
The refundable portion of the CTC is limited to 15 percent of earnings above a specified threshold. The American Recovery and Reinvestment Act (ARRA) set that threshold at $3,000 in tax years 2009 and 2010, and the administration’s 2011 budget proposes to maintain that level in future years. However, if this budget proposal is not adopted and the ARRA threshold is allowed to expire, the earnings floor will revert to its previous level—which would have been $12,550 in 2009—and continue to increase annually as it is indexed for inflation, further eroding the benefit each year for working families whose wages do not keep pace.
Though delivered through the tax code, the CTC is the largest of any federal cash assistance program for children. While it provides an important work incentive for lower-income families, it also acts as the mechanism through which the federal government delivers extra financial support to families raising children. Letting the earnings threshold revert to pre-ARRA levels would exclude a significant number of lower-income families from receiving this support.