Key Issues in Tax Reform: The Child Tax Credit

Key Issues in Tax Reform: The Child Tax Credit

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November 14, 2017
Key Issues in Tax Reform: The Child Tax Credit
The Credit
child on their federal income tax return. Valid TINs include
The child tax credit (CTC) allows a taxpayer to reduce their
individual taxpayer identification numbers (ITINs) and
federal income tax liability by up to $1,000 per qualifying
Social Security numbers (SSNs). ITINs are issued by the
child. A family with four qualifying children, for example,
Internal Revenue Service (IRS) to noncitizens who do not
is eligible for a credit of up to $4,000. If the value of the
have and are not eligible to receive SSNs. ITINs are
credit exceeds the amount of tax a family owes, the family
supplied solely so that noncitizens are able to comply with
may be eligible to receive a full or partial refund of the
federal tax law, and do not affect immigration status.
difference. The total amount of their refund is calculated as
15% (the refundability rate) of earnings that exceed $3,000
History and Background
(the refundability threshold), up to the maximum amount of
The child tax credit was enacted as part of the Taxpayer
the credit. The refundable portion of the child tax credit (the
Relief Act of 1997 (P.L. 105-34). When it initially went
portion that exceeds a taxpayer’s income tax liability) is
into effect in 1998, the credit was a $500-per-child
referred to as the additional child tax credit, or ACTC.
nonrefundable credit, which primarily benefited middle-
Low- and moderate-income taxpayers may receive all or
and upper-middle-income families. Since enactment,
some of the child tax credit as the ACTC.
various laws have modified key parameters of the credit,
expanding the availability of the benefit to more low-
The credit phases out for higher-income taxpayers. For
income families while also increasing the amount of the tax
married couples filing jointly, the credit begins to phase out
credit. The first significant change to the child tax credit
when income exceeds $110,000; for most other taxpayers,
occurred with the enactment of the Economic Growth and
this threshold is $75,000. It takes $20,000 of income above
Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L.
each threshold to phase out $1,000 of the tax credit. Hence,
107-16). EGTRRA increased the amount of the credit over
a married couple with one qualifying child will be ineligible
time to $1,000 per child and made it partially refundable
for the credit if their income exceeds $130,000. If they have
under the earned income formula.
two qualifying children, they will be ineligible for the credit
if their income exceeds $150,000.
In 2008 and 2009, Congress passed legislation—the
Emergency Economic Stabilization Act of 2009 (EESA;
Currently, the maximum credit per child, refundability
P.L. 110-343) and the American Recovery and
threshold, and phase-out thresholds are not indexed for
Reinvestment Act of 2009 (ARRA; P.L. 111-5)—that
inflation (NII). Table 1 provides an overview of key
further expanded the availability and amount of the credit to
provisions of the child tax credit under current law.
taxpayers whose income was too low to either qualify for
the credit or be eligible for the full credit. ARRA lowered
Table 1. Parameters of the Child Tax Credit
the refundability threshold to $3,000 for 2009 through
2010. The ARRA provisions were subsequently extended
Parameter
Current Law
several times and made permanent by the Protecting
Max Credit Per Child
$1,000 (NII)
Americans from Tax Hikes (PATH) Act (Division Q of
P.L. 114-113).
Max Refundable Credit Per
$1,000 (NII)
Child
Cost
Administrative data from the IRS show that the amount of
Refundability Threshold
$3,000 (NII)
aggregate credit dollars claimed by all taxpayers has grown
Refundability Rate
15%
from roughly $15 billion in 1998 to nearly $55 billion in
2015, as illustrated in Figure 1. Roughly half the credit
Phase-Out Threshold
$75,000 unmarried (NAI)
offsets income tax liability (the nonrefundable portion of
$110,000 married* (NAI)
the credit), and the other half exceeds income tax liability
Phase-Out Rate
5%
(the refundable portion of the credit, or ACTC).
Source: Internal Revenue Code, 26 U.S.C. §24.
Notes: NII = not indexed for inflation. * = married filing jointly.
Generally, a qualifying child for the child tax credit is the
taxpayer’s dependent child who is under 17 years old and
who lives with the taxpayer for more than half the year. In
addition, the child must be a U.S. citizen or a resident or
national of the United States. The statute requires that
taxpayers who claim the child tax credit provide a valid
Taxpayer Identification Number (TIN) for each qualifying
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Key Issues in Tax Reform: The Child Tax Credit
Figure 1. Total Child Tax Credit Dollars, 1998-2015
In both bills, the refundability rate and the phase-out rate
are unchanged from current law (see Table 1). The Senate
tax reform legislation would also increase the age limit of
the qualifying child to include 17 year olds.
In addition, both bills would change the ID requirement for
qualifying children. H.R. 1, as reported, would require
taxpayers to provide the name and SSN for any child for
whom they claim the credit. The Senate bill would limit this
requirement to taxpayers claiming the ACTC. Failure to
provide the child’s current SSN may result in the taxpayer
being denied the credit under math error authority. These
changes would go into effect in 2018 as currently drafted.

(Both bills would create new tax benefits for nonchild
Source: IRS Statistics of Income.
dependents. These tax provisions are beyond the scope of
Distribution of Benefits
this In Focus.)
The CTC is widely distributed across the income
For most taxpayers, the amount of the credit would
distribution, with families at most income levels benefiting,
increase. One example of this is illustrated in Figure 3.
as illustrated in Figure 2. Lower-income families benefit
However, lower-income taxpayers would generally receive
from the CTC because of its refundability. The benefit to
little if any benefit from the proposed tax reform changes to
upper-income families (e.g., those with income over
the credit.
$200,000) is limited because the credit phases out at higher
income levels.
Figure 3. Credit Amount by Income Level for a
Married Couple with 2 Children Under Current Law
Figure 2. Distribution of Total Child Tax Credit
and Proposals
Dollars by Adjusted Gross Income (AGI), 2015

Source: IRS Statistics of Income, Table 3.3.

Tax Reform Proposals
Sources: CRS calculations based on current law; H.R. 1, as reported;
and the chairman’s mark as described in JCX-51-17.
Table 2 provides a comparison of changes to the child tax
credit made by the current versions of the House and Senate
Notes: This is a stylized example that assumes that al income is
tax reform bills.
from earnings, earnings equal adjusted gross income (AGI), and the
taxpayer claims the standard deduction. In addition, under H.R. 1, the
Table 2. How House and Senate Tax Reform
taxpayer is assumed to claim $600 of the family credit.
Proposals Modify the Child Tax Credit
Changes to the child tax credit are only one component of
Credit
Senate Bill,
H.R. 1 and do not necessarily indicate how this bill would
Parameter
H.R. 1, as Reported
Chairman’s Mark
affect income tax liabilities generally. Some families that
Max Credit Per
$1,600 (NII)
$1,650 (NII)
receive a higher child tax credit under this bill could pay
Child
more in taxes; others may pay less. The Joint Committee on
Taxation (JCT) has estimated that although taxes would fall
Max Refundable
$1,000
$1,000 (II)
for all taxpayers in 2019, they would increase for some
Credit Per Child (NII after 2022)
taxpayers by 2023 in comparison to current law.
Refundability
$3,000 (NII)
$2,500 (NII)
Threshold
Margot L. Crandall-Hollick, Specialist in Public Finance
Phase-Out
$115,000 unmarried
$500,000 unmarried
IF10773
Threshold
$230,000 married*
$1 mil ion married*
(NII)
(NII)
Sources: H.R. 1, as reported, and JCX-51-17.
Notes: NII = not indexed for inflation. II = indexed for inflation. * =
married filing jointly.
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Key Issues in Tax Reform: The Child Tax Credit

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