Child Tax Credit

The Child Tax Credit (CTC) is a partially-refundable tax credit designed to lessen the impact of income taxes for families raising children. Data shows that low-income families spend a larger share of their pre-tax income directly on their children than those with higher incomes (25 percent v. 16 precent for middle class families and 12 percent for wealthy families). The CTC is the largest tax code provision benefiting families with children, which is estimated to have distributed $52 billion in benefits for 35 million families in 2010. The Center on Budget and Policy Priorities estimates that in 2009, the CTC protected 2.3 million people from poverty, including 1.3 million children. Persons with at least one qualifying child who file federal tax returns can get a CTC of up to $1,000 for each child under 17 years old. It is estimated that a $1,000 increase in family income helps increase child math scores by 2 percent and reading scores by 3.5 percent. To qualify for the CTC, the tax filer's earned income must be at least $3,000 in 2011. Families earning more than $75,000 for single persons and $110,000 for married couples may not claim the credit.

The CTC is also refundable, meaning that even if the worker’s CTC is higher than what he/she owes in income tax, the worker can get a partial refund of the difference. This money can be used to pay bills, attend school, buy a car, build assets, etc. Asset building is one of clearest pathways out of poverty. The refundability of the CTC is what makes it so important to low-income families. Non-refundable tax credits only reduce income tax liability. Because low-income families many times owe little or no income tax (though they still pay other taxes, like payroll, sales, and property taxes), they would receive little if any benefit from a non-refundable CTC. Therefore, the refundability of the CTC, just like the Earned Income Tax Credit (EITC), is a valuable benefit for families struggling to make ends meet.

However, the CTC is only partially refundable. Unlike the EITC, where the tax filer simply gets the difference between the EITC and what his/her owes in income tax, many low-income CTC families only get part of the credit back as a refund. The CTC is first used to reduce or eliminate the family’s income tax liability. After that, if there is any credit remaining, the family currently receives a refund equal to the lesser of: (1) the amount of the family’s CTC that remains, or (2) 15 percent of the family’s earned income over $3,000. Because of this limitation, a family must earn close to $10,000 per year to receive the full $1,000 as a refund.

Expand the Child Tax Credit for More Low-income Families

The current CTC, while a vast improvement over previous law, still excludes America's poorest families (those who earn less than $3,000 per year). Also, the credit is only partially refundable thus requiring low-income families to earn more to receive the full credit as a refund. Finally, the current $3,000 income eligibility threshold and $1,000 credit amount are only temporary. Unless Congress acts, the CTC will be dramatically scaled back in 2013, reducing or eliminating the credit for millions of low-income children and their families.

RESULTS supports the following expansions of the Child Tax Credit:

• Permanently lower CTC minimum income threshold to zero so the lowest income families can participate
• Make the CTC fully refundable so those with the lowest incomes can get the full benefit of the credit
• Retain the current $1,000 maximum credit amount permanently

RESULTS and its allies will continue to work to see that these changes are enacted into law. At a minimum, Congress should act to:

• Make permanent the $3,000 eligibility threshold from the American Recovery and Reinvestment Act (ARRA)
• "De-index" the threshold to inflation (i.e. no inflation adjustments) to allow those whose incomes do not rise as quickly as inflation to still claim the CTC.           

Cuts to CTC on the Table in Budget Battles

The House Ryan Republcian budget passed directs the Ways and Means Committee to find $53 billion in savings over ten years, $7.8 billion of which the committee hopes to achieve by reviving an anti-immigrant cut to the Child Tax Credit (CTC). The committee has revived an old proposal that would require taxpayers to provide a Social Security Number for their eligible children – an eligibility requirement aimed to exclude poor children, whose working parents use a Taxpayer Identification Number rather than a Social Security Number. It’s clear that children will bear the brunt of the proposed changes. According to the First Focus, this change could raise taxes on the families of more than 5.5 million children, including 4.5 million U.S. citizens. Denying access to the CTC takes an average of $1,800 out of the pockets of low-income families – who, of families at all income levels, spend the highest percentage of their income directly on their children’s needs.

A similar proposal was on the table during the debate around the extension of the payroll tax cut and other provisions, when some in Congress hope to offset the extension by changing the eligibility of the CTC by requiring claimants to have a Social Security number. Fortunately, due in part to phone calls and e-mails to Congress from RESULTS volunteers and other advocates around the country, the CTC proposal was dropped in final negotiations. On February 17, the House (by a vote of 293-132) and the Senate (by a vote of 60-36) passed the extensions; President Obama signed them into law on February 22.

Background: CTC Reforms 2001-2010

When it was first enacted, the CTC was non-refundable for families with one or two qualifying children. These families could only apply the credit toward reducing any federal income tax liability they had (before taking the EITC). If a family did not owe any taxes, they would not be eligible for the credit. In 2001, the CTC joined the EITC as a source of income support for low-income working families with children. Thanks in part to the efforts of RESULTS and its allies, the CTC was doubled to $1,000 per child and made partially refundable for families earning over $10,000. Making the CTC partially refundable was an especially important reform because it made the credit available to lower-income families, as outlined above.

Despite this expansion, the CTC still excluded many low-income children from eligibility. With the income eligibility threshold set at $10,000, a family that earned less than that was deemed “too poor” to get the credit. The 2008 Tax Policy Center Briefing Book reported that in 2007, 27 percent of children whose parents work lived in families who received less then the full credit because their parents earned too little. “Forty percent of these children are in families that get no credit at all because their earnings fall below the refundability threshold.” Furthermore, the threshold was adjusted upward for inflation each year. By 2008, it had risen to $12,050. This became yet another barrier to benefits for low-income families. First, for those who fell below the threshold, the fact that it went up each year made it more and more difficult to become eligible, considering that low-income wages normally rise less than the rate of inflation, if at all. Second, for low-income families who were eligible for the CTC, because their refund was based on the family’s income above the threshold (see above), if the threshold went up but their income did not, their refund got smaller.

RESULTS and our allies worked to remedy this problem. RESULTS advocated for lowering the income eligibility threshold to zero and making the credit fully refundable. This would not only allow the lowest income families to claim the credit (remember, the credit is designed to help raise their children) and allow them to get a larger refund, it would also simplify the process significantly. In 2008, RESULTS and our allies successfully lobbied Congress to lower the income eligibility threshold and Congress responded by lowering it from $12,050 to $8,500 for the 2008 tax year. As a result, 13 million low-income children benefited from this change.

Because the 2008 change was only temporary, RESULTS and our allies again pushed for a broader expansion of the CTC in the economic recovery bill Congress and President Obama proposed in early 2009, the American Recovery and Reinvestment Act (ARRA). Again, we were successful; the final bill lowered the threshold to $3,000 for tax years 2009 and 2010. The Center on Budget and Policy Priorities estimates this opened up the CTC to another 3 million new children and expanded the credit for ten million more, with 80 percent of these benefits going to households earning at least $10,000 per year.

Unfortunately, this expansion was only temporary. Without an extension, over 18 million children would have seen their CTC reduced or eliminated in 2011, resulting in 600,000 children falling back into poverty. To avert this injustice, RESULTS and our allies pushed hard to get the ARRA expansion extended. Because of this work, a two-year extension of the $3,000 CTC threshold was included in the Tax Relief Act of 2010 passed by Congress in December 2010.

Unfortunately, by not making it permanent, the CTC will revert back to its pre-2001 levels in 2013 if Congress does not act. RESULTS strongly urges Congress to make the ARRA improvements to the CTC permanent and to expand the credit so that all low-income families can benefit.