How the CTC Operates Now
A child tax credit (CTC) of up to $2,000 is available to taxpayers for each citizen child under the age of 17. For single parents, the credit is lowered by 5% of adjusted gross income exceeding $200,000 ($400,000 for married couples). The extra child tax credit (ACTC), also known as the refundable CTC, allows taxpayers to receive up to $1,600 of the remaining amount as a refund if the benefit exceeds taxes payable. Only 15% of income over $2,500 is eligible for the ACTC.
Generally speaking, the CTC is not inflation-indexed. The amount of credit that families with children under the age of 17 are eligible to receive as a refund is an exception to this rule. This sum, which was $1,400 in 2018, will rise yearly in line with inflation until it reaches the maximum credit amount of $2,000. The credit’s refundable component is $1,600 in 2030. With inflation, the refundable amount rises by $100 each time.
Dependants who were not qualified for the $2,000 CTC for children under the age of 17 might now get a $500 credit as of 2018 (figure 1). Prior to 2018, these people would have been eligible for a dependent exemption, which was abolished by the 2017 Tax Cuts and Jobs Act (TCJA), but they would not have been eligible for a tax credit. Children who are 17–18 years old or 19–24 years old and enrolled full-time in school for at least five months of the year are eligible for this credit as dependents. Older dependents are also included; they make up around 6% of all dependents eligible for the CTC.
The CTC is expected to return to its pre-TCJA state after 2025. It will thereafter be deducted by 5 percent of adjusted gross income over $75,000 ($110,000 for married couples), and taxpayers will be eligible to claim a credit of up to $1,000 for each kid under the age of 17. Taxpayers will be eligible to receive the remaining amount as a refund (the ACTC) if the credit exceeds the amount of taxes due. Only fifteen percent of earnings over $3,000 will be eligible for the ACTC.
The CTC’s effects
According to the Tax Policy Center, 90 percent of households with children got an average CTC of $2,390 in 2022. Since families may have more than one kid, the average credit may be more than the maximum per child credit. The CTC benefitted families with children across all income levels, although it was least likely to help families in the lowest income quintile since more of them would not have enough income to be eligible. With an average credit of $1,460, just under three-quarters of families in the lowest income quintile qualified for a CTC. Because low-income families are more likely to be restricted to the refundable element of the credit—which was set at $1,500 in 2022 rather than the full $2,000 maximum for the nonrefundable credit—the average credit was the smallest for this quintile.
Moderate- and middle-income families had the greatest average credit received and the largest percentage of families with children receiving the credit. In the second income quintile, 94 percent of families with children claimed a CTC, 98 percent in the third quintile, and 99 percent in the fourth quintile. Due to the credit’s phase-out at high earnings, the percentage of families with children receiving a credit then falls to 90% in the highest income quintile.
The financial stability of low-income households with children is significantly impacted by the CTC. 4.3 million fewer people, including around 2.3 million children, would have been below the federal poverty line in 2018 if the official assessment of poverty had included the CTC as income (including the refundable component). An extra 12 million individuals, including 5.8 million children, would have experienced less severe poverty if the credit had been counted (Center on Budget and Policy Priorities 2019).
CTC’s Recent History
For the 2021 tax year, the Child Tax Credit (CTC) was raised by the American Rescue Plan Act (ARPA). A CTC of up to $3,600 for children under the age of six and up to $3,000 for children between the ages of six and seventeen may be claimed by taxpayers. A filer with more than one kid might claim an unlimited amount of credit. Low-income families may get the maximum credit regardless of their income because it was completely refundable. Families may have gotten a tax refund if the credit had been greater than the amount of taxes due.
These advantages were only available to US-citizen children. There were two phases to the credit phase-out. Prior to reaching pre-2021 levels, the credit started to decline at a rate of 5% of adjusted gross income, starting at $112,500 of income for single parents ($150,000 for married couples). Second, 5% of adjusted gross income beyond $200,000 for single parents ($400,000 for married couples) was deducted from the credit’s value (figure 1, blue lines).
The Tax Cuts and Jobs Act (TCJA) of 2017 had modified the CTC before the ARPA. The TCJA quadrupled the CTC for children under the age of 17 from $1,000 to $2,000 per kid, with effect from 2018. Up to $1,400 of the credit may be obtained as a refundable credit, according to the 2018 law. The amount that may be refunded was adjusted for inflation. This credit was only available to US-citizen children. Additionally, the law permitted dependents who are not eligible for the $2,000 credit to receive a $500 nonrefundable credit. The law is only in effect until after 2025. At that time, other dependents will no longer be eligible for a CTC, and the credit for children under the age of 17 will return to $1,000 per kid.
Prior to these modifications, the CTC was raised to $1,000 per kid by the American Taxpayer Relief Act of 2012 from its pre-2001 amount of $500 per child. Additionally, it temporarily prolonged the provisions of the anti-recession stimulus package, the American Recovery and Reinvestment Act of 2009, which lowered the earnings threshold for the refundable CTC from $10,000 (adjusted for inflation beginning after 2002) to $3,000 (not adjusted for inflation). The $3,000 refundability level was made permanent by the 2015 Bipartisan Budget Act. Beginning in 2018, the TCJA further lowered the refundability threshold to $2,500; however, this lower barrier will end in 2025, when the $3,000 level will be reinstated.
In 2001, the refundable CTC was first created to work in tandem with the earned income tax credit (EITC). The EITC did not grow after 2001, when earnings for families with two children hit $10,020. Families were now eligible to receive a subsidy for wages beyond the $10,000 earnings level for the refundable CTC. The $10,000 earnings barrier was adjusted for inflation, much as the EITC earning threshold numbers. This connection between the phase-in of the refundable CTC and the EITC was severed when the earnings level for the refundable CTC was lowered, first to $8,500 in 2008 and subsequently to $3,000 in 2009.