Child Tax Credit: What Lies Ahead?

Child Tax Credit: What Lies Ahead?

INSIGHTi

The Child Tax Credit: What Lies Ahead?
Updated February 1, 2024
The child tax credit has been temporarily modified several times in recent years. On January 16, Senate
Finance Committee Chair Ron Wyden and House Ways and Means Chair Jason Smith announced that
they had reached the deal on a “framework” that included further changes to the child credit.
Legislative text of this proposal (H.R. 7024) was released January 17, and a markup in the Ways and
Means Committee occurred on January 19, during which time the bill, as amended, was voted out
favorably by the committee by a vote of 40-3. The House passed the bill by a vote of 357-70 on January
31. This Insight provides background to those discussions by summarizing prior legislative changes to the
credit and outlining the proposed changes to the child credit in H.R. 7024.
Recent Legislative Changes
Under permanent law—last in effect in 2017 and scheduled to go back in effect in 2026—the child tax
credit allowed eligible households to reduce their income tax liability by up to $1,000 per child aged 16 or
lower. Lower-income working taxpayers were eligible to receive part or all of this benefit as the
refundable portion of the credit, sometimes called the additional child tax credit or ACTC. The ACTC
phased in with earned income if households had at least $3,000 of earnings. For higher-income
households, the child credit phased out.
The law commonly referred to as the Tax Cuts and Jobs Act (TCJA; P.L. 115-97) made several temporary
changes to the permanent credit that are in effect through 2025. The TCJA increased the maximum credit
amount to $2,000 per child, modified the ACTC formula to begin phasing in at $2,500 of earned income
(compared to $3,000), capped the refundable portion of the credit at $1,400 per child (inflation-adjusted
to $1,600 per child in 2023 and $1,700 per child in 2024), and increased the income levels at which the
credit begins to phase out.
The American Rescue Plan Act of 2021 (ARPA; P.L. 117-2) layered additional temporary changes on top
of the TCJA changes for 2021 only. ARPA increased the maximum credit to $3,000 per child ($3,600 per
child for young children), eliminated the phase-in of the credit for low-income taxpayers so they were
eligible to receive the full or maximum amount of the credit irrespective of how much earned income they
had (this is sometimes referred to as “full refundability”), and expanded the eligibility age for children to
include 17-year-olds. These changes expired as scheduled at the end of 2021.
Aside from the TCJA change to the maximum ACTC, none of the parameters of the credit are adjusted for
inflation.
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Details of these parameters can be found in the table at the end of this Insight. The impact of these
changes on a hypothetical married couple with two children—one young (under 6 years old) and one
older (6 to 16 years old)—is illustrated below.

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Proposals in the 118th Congress
Many policymakers remain interested in expanding the credit, especially to benefit low- and moderate-
income families, which research suggests benefited the most from the ARPA changes. Various proposals
have been introduced to modify the child credit in the 118th Congress. Some of these proposals would
reinstate a modified version of the ARPA changes (e.g., S. 1992, H.R. 3899, H.R. 5953).
Some policymakers, however, have expressed concerns that extending the ARPA changes would
discourage some recipients from working. Under permanent law and the TCJA changes, the credit phases
in with earned income for low-income households. This effectively requires a low-income single parent to
work, or at least one parent among a low-income married couple to work. The ARPA credit, in contrast,
had no work requirement, since the credit did not phase in with earned income.
Most research conducted during the pandemic did not find that the ARPA child credit discouraged people
from working, although the findings may have been complicated by specific economic issues associated
with the COVID-19 pandemic and the fact that the ARPA credit was in place for only one year. Most
estimates of the impact of the ARPA credit on employment if the credit were to be extended for longer or
made permanent predict a relatively modest impact on employment. (These estimates vary significantly
with numerous required modeling assumptions.)
Concerns about the employment effects of an ARPA credit may have persuaded some policymakers to
focus on expanding the existing credit for low-income families while retaining a phase-in, reflected in
H.R. 7024.
H.R. 7024
H.R. 7024 includes several provisions that would expand the child tax credit for low-income families,
including
1. The ACTC would be calculated per child: After the ACTC amount is calculated under
current law (15% of earned income above $2,500), it would then be multiplied by the
number of children. This amount would still be subject to the ACTC limit (the ACTC
maximum multiplied by the number of children). This provision would effectively phase
in the credit faster for families with more children.
2. The maximum amount of the ACTC would increase: The ACTC maximum would rise
from $1,600 to $1,800 per child in 2023 and from $1,700 to $1,900 per child in 2024 and
equal $2,000 (adjusted for inflation) in 2025.
3. Taxpayers could use prior-year earned income to calculate the ACTC: Taxpayers
could calculate the ACTC using their prior-year earned income if their current-year
earned income was less than their prior-year earned income. (This is similar to a
temporary provision enacted during the COVID-19 pandemic.) This would apply for
2024 and 2025.
4. The IRS would recalculate the credit on 2023 returns: The IRS would be directed, to
the extent practicable, to recalculate the credit on 2023 returns based on the changes in
the bill if a taxpayer had filed their return before these changes took effect (2023 returns
can be filed beginning on January 29, 2024).
The framework also proposes adjusting the child credit for inflation since 2022 in 2024 and 2025,
meaning moderate- and higher-income taxpayers would likely receive a credit of more than $2,000 per
child in 2024 and 2025.

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The Center on Budget and Policy Priorities (CBPP) estimates that of the 19 million children in low-
income families that currently receive less than the maximum credit, 16 million of them would benefit
from this proposal and 400,000 would be lifted out of poverty the first year it was in effect.

Budgetary Impact
The average annual cost of the permanent law child credit is about $50 billion per year. The TCJA
changes, if extended, are estimated by CBO to cost an additional $80 billion per year. For 2021, the ARPA
changes increased the costs of the TCJA-modified credit by an additional $105 billion per year according
to estimates from the Joint Committee on Taxation (JCT). The Joint Committee on Taxation estimates the
cost of these changes (including those made by the substitute amendment) to be an average of $11 billion
per year ($33 billion between FY2024 and FY2026).

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Author Information

Margot L. Crandall-Hollick

Specialist in Public Finance

Disclaimer
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