CRS Updates Child Tax Credit Overview

The Child Tax Credit: Current Law

Congressional Research Service
https://crsreports.congress.gov
R41873

Updated June 22, 2020

Margot L. Crandall-Hollick
Acting Section Research Manager

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 SUMMARY

This report provides an overview of the child tax credit under current law, including temporary changes made by the 2017 tax revision (P.L. 115-97).

When calculating the total amount of federal income taxes owed, eligible taxpayers can reduce their federal income tax liability by the amount of the child tax credit. Currently, eligible families that claim the child tax credit can subtract up to $2,000 per qualifying child from their federal income tax liability. The maximum amount of credit a family can receive is equal to the number of qualifying children in a family multiplied by $2,000. If a family's tax liability is less than the value of their child tax credit, they may be eligible for a refundable credit calculated using the earned income formula. Under this formula, a family is eligible for a refund equal to 15% of their earnings in excess of $2,500, up to the maximum amount of the refundable portion of the credit. The maximum amount of the refundable portion of the credit is $1,400 per qualifying child. The credit phases out for single parents with income over $200,000 and married couples with income over $400,000. Many of these parameters are scheduled to expire at the end of 2025 under P.L. 115-97.

The child tax credit was created in 1997 by the Taxpayer Relief Act of 1997 (P.L. 105-34) to help ease the financial burden that families incur when they have children. Like other tax credits, the child tax credit reduces tax liability dollar for dollar of the value of the credit. Initially the child tax credit was a nonrefundable credit for most families. A nonrefundable tax credit can only reduce a taxpayer's income tax liability to zero, while a refundable tax credit can exceed a taxpayer's income tax liability, providing a cash payment to low-income taxpayers who owe little or no income tax.

Since it was first enacted, the child tax credit has undergone significant changes. Most recently at the end of 2017, Congress expanded the credit, especially for middle- and upper-income taxpayers, by doubling the credit amount and more than tripling the income level at which the credit begins to phase out. Additionally, although comparatively more modest, changes were made to the refundable portion of the credit as well, including increasing the refundable credit amount from $1,000 to $1,400 per child and lowering the refundability threshold from $3,000 to $2,500. These changes are scheduled to be in effect from 2018 through the end of 2025.

Estimates from the IRS indicate that the total dollar amount of the child tax credit has increased significantly since enactment from approximately $22 billion to $51 billion for 2017. These estimates do not include the impact of recent legislative changes made by P.L. 115-97, which will, all else being equal, expand the total cost of this tax benefit.

The Tax Policy Center (TPC) estimated the distribution of the child tax credit by income level for 2019 under current law (including the changes made by P.L. 115-97) and found that the majority of child tax credit dollars will go to taxpayers with more than $75,000 of income, with nearly one-third of the benefit going to taxpayers with income between $100,000 and $200,000. In comparison, a relatively small share will go to very-low-income or very-high-income taxpayers. TPC also estimated that the vast majority of taxpayers with children will receive the child tax credit. Slightly less than half of the lowest-income taxpayers with children will receive the credit and no taxpayers with children and income over $1 million will receive the credit. Finally, TPC estimated that taxpayers with income between $100,000 and $200,000 will on average receive the largest credit of over $3,000. Taxpayers with children and income under $20,000 will receive on average a credit of less than $1,000, while the wealthiest taxpayers with children will receive on average a credit of $10.

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Contents

Introduction

Current Law

Data on the Child Tax Credit

Figures

Figure 1 Child Tax Credit Amount by Income Level

Figure 2. Total Real Child Tax Credit Dollars, 1998-2017

Figure 3. Estimated Share of Total Child Tax Credit Dollars by Income Level, 2019

Figure 4. Estimated Share of Taxpayers with Children and All Taxpayers Receiving the Child Tax Credit by Income Level, 2019

Figure 5. Estimated Average Child Tax Credit Amount by Income Level for Taxpayers with Children and All Taxpayers, 2019

Tables

Table 1. Overview of Key Aspects of the Child Tax Credit Under Current Law

Contacts

Author Information

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 Introduction

The child tax credit was created in 1997 by the Taxpayer Relief Act of 1997 (P.L. 105-34) to help ease the financial burden that families incur when they have children. Like other tax credits, the child tax credit reduces tax liability dollar for dollar of the value of the credit. Initially the child tax credit was a nonrefundable credit for most families. A nonrefundable tax credit can only reduce a taxpayer's income tax liability to zero, while a refundable tax credit can exceed a taxpayer's income tax liability, providing a cash payment primarily to low-income taxpayers who owe little or no income tax. Over the past 20 years, legislative changes have significantly changed the credit, transforming it from a generally nonrefundable credit available only to the middle and upper-middle class, to a refundable credit that more low-income families are eligible to claim.

This report provides an overview of the credit under current law and also provides some summary data on these benefits. For a complete legislative history of the credit, see CRS Report R45124, The Child Tax Credit: Legislative History, by Margot L. Crandall-Hollick.

Current Law

The child tax credit allows taxpayers to reduce their federal income tax liability (the income taxes owed before tax credits are applied) by up to $2,000 per qualifying child. If the value of the credit exceeds the amount of tax a family owes, the family may be eligible to receive a full or partial refund of the difference. The refundable portion of the credit is sometimes referred to as the additional child tax credit or ACTC. The total amount of their refund is calculated as 15% (the refundability rate) of earnings that exceed $2,500 (the refundability threshold), up to the maximum amount of the refundable portion of the credit ($1,400 per child).

The credit phases out for higher-income taxpayers. The child tax credit can offset a taxpayer's Alternative Minimum Tax (AMT) liability. Currently, the maximum credit per child, refundability threshold, and phaseout thresholds are not indexed for inflation. From 2018 to 2025, the maximum amount of the ACTC is indexed for inflation. Table 1 provides an overview of key provisions of the child tax credit under current law and how they will change beginning in 2026, as scheduled under P.L. 115-97.

Table 1. Overview of Key Aspects of the Child Tax Credit Under Current Law

Parameter	2018-2025	Post 2025a
Maximum credit per child	$2,000	$1,000
Maximum refundable portion of the credit per child (ACTC)	$1,400	$1,000
Refundability Threshold	$2,500	$3,000
Refundability Rate	15%	15%
Phaseout Threshold	$200,000 unmarried taxpayersb $400,000 married taxpayers (joint returns)	$75,000 unmarried taxpayers $110,000 married taxpayers (joint returns)
Phaseout Rate	5%	5%
Offset AMT tax liability	YES	YES
Source: Internal Revenue Code, 26 U.S.C. §24. Note: The refundable portion of the child tax credit is often referred to as the additional child tax credit or ACTC. a Absent legislative action, many of the changes made to the child tax credit by P.L. 115-97 will expire and the credit parameters will revert to pre-2018 levels. b The phaseout threshold for married taxpayers that file separate returns is $200,000 from 2018-2025. Pre-2018/post 2025, the phaseout threshold for married taxpayers that file separate returns is/will be $55,000.

Detailed Overview of Current Credit

Each of the key parameters of the child tax credit as in effect from 2018 through the end of 2025 is described in more detail below. The legislative changes made to the child tax credit by P.L. 115-97 have significantly expanded the child tax credit, especially for upper-income taxpayers, as illustrated in Figure 1.

Maximum Credit per Child

Eligible families can claim a child tax credit and reduce their federal income tax liability by up to $2,000 per qualifying child.¹ The maximum credit a family can receive is equal to the number of qualifying children a taxpayer has, multiplied by $2,000. For example, a family with two qualifying children may be eligible for a $4,000 credit. Families may receive the child tax credit as a reduction in tax liability (the nonrefundable portion of the credit), a refundable credit (the amount of the credit in excess of tax liability), or a combination of both. ² The refundable portion of the credit — the ACTC — is discussed in the subsequent section.

Beginning in 2026, the maximum amount of the credit is scheduled to revert to $1,000 per qualifying child.

The age and citizenship requirements for a qualifying child for the child tax credit differ from the definition of qualifying child used for other tax benefits and can cause confusion among taxpayers. For example, a taxpayer's 18-year-old child may meet all the requirements for a qualifying child for the EITC, but will be too old to be eligible for the child tax credit.

ID Requirements to Claim the Child Tax Credit

The statute requires that taxpayers who intend to claim the child tax credit provide a valid taxpayer identification number (TIN) for each qualifying child on their federal income tax return. Under a temporary change in effect from 2018 through the end of 2025, the child's TIN must be a work-authorized Social Security number (SSN). The SSN must be issued before the due date of the tax return. Failure to provide the child's SSN may result in the taxpayer being denied the credit (both the nonrefundable and refundable portions of the credit).

Absent any legislative changes, beginning in 2026, a valid TIN for qualifying children will include individual taxpayer identification numbers (ITINs) and Social Security numbers (SSNs). ITINs are issued by the Internal Revenue Service (IRS) to noncitizens who do not have and are not eligible to receive SSNs. ITINs are supplied solely so that noncitizens are able to comply with federal tax law, and do not affect immigration status.

In addition, in order to claim the child tax credit in a given tax year, the taxpayer must also provide their own taxpayer identification number that must be issued before the due date of the tax return. This is a permanent ID requirement that is not scheduled to expire.

Disallowance of the Credit Due to Fraud or Reckless Disregard of the Rules

A. tax filer is barred from claiming the child tax credit for a period of 10 years after the IRS makes a final determination to reduce or disallow a tax filer's child tax credit because that individual made a fraudulent child tax credit claim. A tax filer is barred from claiming the child tax credit for a period of two years after the IRS determines that the individual made a child tax credit claim “due to reckless and intentional disregard of [the] rules” of the child tax credit, but that disregard was not found to be due to fraud.⁹

Data on the Child Tax Credit

Estimates from the Internal Revenue Service (IRS) and Tax Policy Center highlight several key aspects of the child tax credit:

• The total dollar amount of the child tax credit has grown over time: Data from the IRS indicate that the total dollar amount of the child tax credit has increased significantly since enactment. These estimates do not include the impact of recent legislative changes made by P.L. 115-97, which, all else being equal, will expand the total cost of this tax benefit.

• In 2019, the majority of the tax benefit went to taxpayers with income between $75,000 and $500,000: The Tax Policy Center (TPC) estimates that the majority of child tax credit dollars in 2019 went to taxpayers with more than $75,000 of income, with nearly one-third of the benefit going to taxpayers with income between $100,000 and $200,000.¹⁰ In comparison, a relatively small share went to very-low-income or very-high-income taxpayers.

• In 2019, approximately 90% of taxpayers with children and income between $30,000 and $500,000 received the child tax credit. The Tax Policy Center (TPC) estimates that across most income groups, the vast majority of taxpayers with children received the child tax credit in 2019. About half of the lowest-income taxpayers received the credit and virtually no taxpayers with children and income over $1 million received the credit.

• In 2019, taxpayers with income between $100,000 and $200,000 on average received the largest credit. The Tax Policy Center (TPC) estimates that taxpayers with children and income between $100,000 and $200,000 on average received a credit of over $3,000 in 2019. Taxpayers with children with income under $20,000 received on average a credit of less than $1,000, while the wealthiest taxpayers with children received on average a credit of $10.

Total Child Tax Credit Dollars, 1998-2017

IRS estimates of the amount of total child tax credit dollars (inflation adjusted to 2017 dollars) received by taxpayers indicate that this tax benefit has more than doubled in size since enactment, from aggregate receipt of $22 billion in 1998 to approximately $51 billion in 2017, as illustrated in Figure 2.

A significant component in the growth of the child tax credit has been the growth in the refundable portion of the credit, which now comprises approximately half of child tax credit dollars received by taxpayers. (For an overview of the legislative changes that have influenced the expansion of both the refundable and nonrefundable portions of the credit, see CRS Report R45124, The Child Tax Credit: Legislative History, by Margot L. Crandall-Hollick.) The most recent IRS data available are for the 2017 tax year (i.e., 2017 income tax returns filed in 2018), and hence do not include the impact of the legislative changes made to the credit by P.L. 115-97. As previously discussed, these legislative changes are currently scheduled to be in effect from 2018 through the end of 2025. The Joint Committee on Taxation has estimated that the modification to the child tax credit formula will cost an estimated $573.4 billion between 2018 and 2026, or on average $64 billion a year.¹¹ (These estimates include the budgetary cost of the $500 nonrefundable credit for non-child tax-credit-eligible dependents.) JCT also estimates that the new SSN requirement will save $29.8 billion between 2018 and 2026, or on average $3 billion per year.

Total Child Tax Credit Dollars by Income Level

The Tax Policy Center (TPC) estimated the distribution of aggregate child tax credit by income level for 2019 under current law (i.e., including the changes made by P.L. 115-97).¹² These estimates include the $500 credit for non-child tax-credit-eligible dependents. TPC estimates that nearly one-third of all child tax credit dollars (30.5%) went to taxpayers with income between $100,000 and $200,000, as illustrated in Figure 3. One-quarter of all child tax credit dollars (25.0%) went to taxpayers with income under $50,000.

Lower-income taxpayers generally receive a credit of $1,400 or less per child, depending on their earnings. In contrast, higher-income taxpayers with sufficient income tax liability receive a credit of $2,000 per child. For example, a single parent with two children and $15,000 of income is eligible for a $1,875 credit (received entirely as the refundable child credit or ACTC), less than the maximum ACTC for two children of $2,800 (2x $1,400) and less than the maximum credit for two children of $4,000 (2 x $2,000). The highest-income taxpayers do not receive a credit due to the credit phaseout.

Share of Taxpayers with Children Receiving the Child Tax Credit

TPC estimated the share of taxpayers with children and all taxpayers that received the child tax credit in 2019. The estimates indicate that among taxpayers with children, almost all taxpayers received the child tax credit. More than 90% of taxpayers with children and income between $40,000 and $500,000 received the child tax credit. In contrast, less than half (47.8%) of taxpayers with children and income under $10,000 received the child tax credit in 2019, and about one-third (38.6%) of taxpayers with children and income between $500,000 and $1 million received the credit, as illustrated in Figure 4.

Fewer low-income families with children benefit from the child tax credit since taxpayers with income under $2,500 (the refundability threshold) are not eligible for the refundable portion of the credit. In contrast, due to the phaseout of the credit at higher income levels, virtually no taxpayers with children and income over $1 million are currently eligible to claim it.

Average Child Tax Credit Amount

TPC estimated the average child tax credit amount by income level for taxpayers with children and all taxpayers in 2019. Their estimates indicate that taxpayers with children and income between $100,000 and $200,000 received the largest credit on average — an estimated $3,040. Taxpayers with children and income under $20,000 received on average a credit of less than $1,000, while the wealthiest taxpayers with children (income over $1 million) on average received a credit of $10.

Lower-income taxpayers are eligible to receive a credit of up to $1,400 per child, although they may receive less depending on their earned income. In contrast, higher-income taxpayers, with sufficient income tax liability, are eligible for up to a $2,000 credit per child. The highest-income taxpayers are ineligible for the credit due to the phaseout.

Author Information

Margot L. Crandall-Hollick
Acting Section Research Manager

Acknowledgments

This report was updated in June 2020 with the assistance of Joseph Hughes, research assistant.

Disclaimer

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