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Up Front

What is the Child Tax Credit? And how much of it is refundable?

Editor's Note:

This post was updated on February 9 and 18, to reflect ongoing developments in Congress.

The Child Tax Credit, which has been expanded significantly by Congress since it was first written into law nearly 25 years ago, is a significant element of the federal government’s effort to aid families with children. Families currently are eligible for a tax credit of up to $2,000 per child under age 17. President Biden proposes to expand the credit, which would, if Congress goes along, substantially reduce the number of children living below the poverty line.

How does the child tax credit work under current law?

Eligible families can claim a tax credit – which reduces income taxes they owe dollar-for-dollar – of up to $2,000 per child under age 17 who is a citizen of the U.S. The size of the credit is reduced by $50 for every $1,000 of adjusted gross income above $200,000 for single parents and $400,000 for married couples.

Families who owe little or no income tax can get cash of up to $1,400 per child, a feature which makes the tax credit partially “refundable,” in the jargon of Washington.

Other dependents – including children ages 17 and 18 and full-time college students ages 19 to 24 – are eligible for a non-refundable credit of up to $500.

Who benefits from the tax credit today?

More than 48 million households are expected to claim the Child Tax Credit for 2020, according to the Joint Committee on Taxation of Congress. This will amount to $117.5 billion for qualifying families – twice the amount provided by the Earned Income Tax Credit, a program which supplements the wages of low-paid workers.

Although important to the low-income families who get it, and often promoted as a way to fight poverty, the Child Tax Credit is not targeted at those families, particularly after the changes made in 2017. About 40% of that $117.5 billion will go to households with incomes above $100,000. A relatively small share goes to low-income households – 15% will go to households with incomes under $30,000.

Who gets the Child Tax Credit in 2020_by income

Jacob Goldin of Stanford and Katherine Michelmore of Syracuse, in October 2020 working paper, documented striking disparities in eligibility for the Child Tax Credit by income and race. While about 90% of all children get some benefit, they find the vast majority of children living in households in the bottom decile of the national income distribution are completely ineligible and the majority of tax-return filers in the bottom 30% are eligible only for a partial credit. In contrast, virtually all children living in households in the top half of the income distribution qualify for the full credit amount. Approximately three-quarters of white and Asian children are eligible for the full Child Tax Credit compared to only about half of Black and Hispanic children.

What is President Biden proposing?

President Biden would increase the credit from $2,000 to $3,600 for children under age 6 and to $3,000 for children under age 18, and he would make it “fully refundable,” meaning that low-income families would get the full amount even if they don’t owe any income taxes. He proposes to do this only for one year, reducing the price tag, but fans of the tax credit both inside and outside the Biden administration say they hope the expansion would be renewed after the first year.

The Center on Budget and Policy Priorities estimates that the Biden proposal would benefit 27 million children (roughly half of all Black and Latino children) whose families don’t get the full credit now because they don’t have enough income – including nearly 10 million who are currently below the poverty line. And the Center on Poverty and Social Policy at Columbia University says this would reduce the poverty rate among children under 18 from 13.6% to 7.5% (using the Census Bureau’s Supplemental Poverty Measure, which takes account of government aid that isn’t counted in the official poverty rate).

How has the Child Tax Credit evolved over the years?

The credit has its roots in a 1991 report by a bipartisan National Commission on Children, which declared that “it is a tragic irony that the most prosperous nation on earth is failing so many of its children” and recommended a $1,000 refundable credit for all children through age 18. A version of the credit was proposed by Republicans in their 1994 Contract with American and by President Clinton in 1995, and was eventually enacted in 1997 as a $500-per-child, non-refundable credit aimed at middle and upper middle income families.

After George W. Bush promised to double the credit as part of the tax cuts he proposed during his 2000 campaign, my Brookings colleague Isabel Sawhill argued for making it refundable so it would aid poor children. This would be, she wrote, controversial. “Many Republicans, in particular, are likely to label it as social welfare by another name. Democrats will point out that, without some refundability, income tax cuts do little to help many Americans.” But it was one way, she argued, to make sure that at least some of the benefits of the Bush tax cuts went to low-income families. When Congress enacted the Economic Growth and Tax Relief Reconciliation Act of 2001, it both doubled the Child Tax Credit to $1,000 per child and made it partly refundable.

The credit has been altered several times since – for more on the legislative history, see this Congressional Research Service report. It was expanded significantly in the 2017 Tax Cuts and Jobs Act, largely at the insistence of Sen. Marco Rubio (R-FL). That law increased the size of the credit for many (though not all) families, boosted the maximum portion of the credit that is refundable, and made many more upper-middle-income families eligible. (The credit is currently reduced gradually for single parents with incomes of more than $200,000 and couples with incomes of more than $400,000; under the prior law, the thresholds were $75,000 for single parents and $100,000 for couples.)

Total value of Child Tax Credit_adjusted for inflation_1998-2020 (1)

What are the politics of the Child Tax Credit?

Expanding the credit has been popular with both Democrats and Republicans in part because assisting low-income and middle-class families with children is regarded by members of Congress as both politically appealing and economically prudent.

Senators Mike Bennet (D-CO) and Sherrod Brown (D-OH) and Representatives Rosa DeLauro (D-CT) and Suzan Delbene (D-WA) have introduced legislation, the American Family Act, that would expand the Child Tax Credit from $2,000 to $3,000 per year for children between the ages of 6 and 16, and to $3,600 for younger children – and make it fully refundable. As written, their bill would reduce the benefits currently available to upper-income families, phasing out the credit beginning at $130,000 for single parents and $180,000 for couples (and eliminating it altogether for single parents with incomes above $150,000 and couples with incomes above $200,000). The American Family Act is popular among Democrats; about three-quarters of the Democrats in the last Congress were co-sponsors. It’s similar to the Biden proposal, though it would shrink the number of upper-income families who can claim the credit.

During the pandemic, the House included a one-year expansion of the credit in the 2020 HEROES Act; the Senate didn’t go along. That approach to COVID relief appealed to some conservative analysts, partly because it was more targeted than sending a check to nearly every household (as Congress eventually did). In the Fall of 2020, a group of conservative scholars and leaders endorsed an additional, one-year, fully refundable Child Tax Credit of $2,000 in an open letter to Congress: “At a time when family budgets are under great stress and many parents have stopped working to care for their children, enlarging the child credit would offer much needed relief.”

In another indication of the credit’s bipartisan appeal, Sen. Mitt Romney (R-UT) joined Sen. Bennet in December 2019 in proposing a compromise that, among other things, would create a new Young Child Credit of $2,500 for children up to age 6, of which $1,500 would be refundable. It would also expand the refundability of the current credit for older children.

What is Congress considering in 2021?

As they work on details of a big COVID relief fiscal package, House Democrats are proposing expanding the credit from $2,000 per child to $3,600 for children under age 6, and $3,000 for children from six through 17—but only for one year. The additional credit (the amount over $2,000 in current law) would start phasing out at annual incomes of $150,000 for couples, $112,500 for single heads of households, and $75,000 for others, lower thresholds than in current law and lower than some Democrats had previously proposed. But the old thresholds would apply to the first $2,000, so no one who is currently eligible for that would be harmed.  Payments would be made monthly beginning in July 2021 based on taxpayers’ 2020 income and family size.

In the Senate, Romney is proposing to enlarge the credit to $4,200 per child under age 6 and $3,000 for those between 6 and 17. His credit would be phased out by $50 for every $1,000 of income above $200,000 for individuals and $400,000 for couples, as with current law. Unlike the Democrats, though, Romney would offset the cost by reducing or eliminating some other tax breaks, including paring back the Earned Income Tax Credit, which pays a bonus for low-wage workers, and by killing the federal tax deduction for state and local taxes (now capped at $10,000). He, too, would make the payments monthly.

 

 

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