The Child Tax Credit
Order Code RS21860
Updated July 31, 2007
The Child Tax Credit
Gregg A. Esenwein
Specialist in Public Finance
Government and Finance Division
Maxim Shvedov
Analyst in Public Sector Economics
Government and Finance Division
Summary
The child tax credit was enacted in 1997, as Congress addressed concerns that the
income tax structure did not adequately reflect a family’s reduced ability to pay taxes
as family size increased. Subsequent changes in 2001, 2003, and 2004 increased the
child tax credit and made it refundable for most families. These recent changes will
sunset (expire) in 2011. The child tax credit is scheduled to decline from $1,000 in 2010
to $500 in 2011.
Multiple bills affecting the child tax credit have been introduced in the 110th
Congress. This report will be updated as legislative action warrants.
Current Law
For tax year 2006, families, below certain income levels, with qualifying children
are allowed a credit against their federal income tax of $1,000 for each qualifying child.
To qualify for the credit the child must be an individual for whom the taxpayer can claim
a dependency exemption. That means the child must be the son, daughter, grandson,
granddaughter, stepson, stepdaughter, or an eligible foster child of the taxpayer. The child
must be under the age of 17 at the close of the calendar year in which the taxable year of
the taxpayer begins. For families with one or two qualifying children, the credit is
refundable to the extent of 15% of a taxpayer’s earned income in excess of $11,300.1
(This earned income threshold is indexed annually for inflation.) For families with three
or more children, the child tax credit is refundable to the extent that the taxpayer’s Social
1 A refundable tax credit means that you receive the tax credit even if you do not have an income
tax liability. For example, a taxpayer with $12,000 of earned income, a zero income tax liability,
and one qualifying child would receive a refundable child tax credit of $105 (15% of $12,000
minus $11,300).
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Security taxes exceed the taxpayer’s earned income tax credit or to the extent of 15% of
their earned income in excess of $11,300, whichever is larger.
The child tax credit is phased out for taxpayers whose adjusted gross incomes (AGIs)
exceed certain thresholds. For married taxpayers filing joint returns, the phaseout begins
at AGI levels in excess of $110,000, for married couples filing separately the phaseout
begins at AGI levels in excess of $55,000, and for single individuals filing as either heads
of households or as singles the phaseout begins at AGI levels in excess of $75,000. The
child tax credit is phased out by $50 for each $1,000 (or fraction thereof) by which the
taxpayer’s AGI exceeds the threshold amounts. These phaseout thresholds are not
indexed for inflation. The child tax credit is allowed in full against a taxpayer’s
alternative minimum tax.
Legislative History
The child tax credit was enacted as part of the Taxpayer Relief Act of 1997.
Congress established the child tax credit to address concerns that the tax structure did not
adequately reflect a family’s reduced ability to pay taxes as family size increased. The
decline (prior to its indexation) in the real value of the personal exemption over time was
cited as evidence of the tax system’s failure to reflect a family’s ability-to-pay. Congress
acted so that the child tax credit would reduce families’ tax liabilities, would better
recognize the financial responsibilities of child rearing, and promote family values.2
Initially, for tax year 1998, families with qualifying children under the age of 17 were
allowed a credit against their federal income tax of $400 for each qualifying child. For
tax years after 1998, the credit increased to $500 per qualifying child. For families with
three or more children the child tax credit was refundable.
The Omnibus Consolidated and Emergency Supplemental Appropriations Act of
1998 allowed personal tax credits (including the child tax credit) to offset an individual’s
regular income tax in full for tax year 1998 even though the personal tax credits might be
larger than the amount by which the taxpayer’s regular income tax exceeded his
alternative minimum tax (AMT). 3
The Ticket to Work and Work Incentives Improvement Act of 1999 extended,
through December 31, 2001, the provision allowing individuals to offset their regular
income tax by the full amount of their personal tax credits regardless of their alternative
minimum tax liability.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made
several major changes to the child tax credit. The child tax credit was increased to
$1,000, with the increase scheduled to phase in between 2001 and 2010. For calendar
years 2001 and 2002 the credit was $600. In calendar years 2003 and 2004 the credit was
scheduled to be $600; for calendar years 2005 to 2008 the credit was scheduled to be
2 Joint Committee on Taxation, JCS-23-97, General Explanation of Tax Legislation Enacted in
1997, Dec. 1997, p. 6.
3 For more information on the interaction of personal tax credits and the AMT, see CRS Report
RL30149, The Alternative Minimum Tax for Individuals, by Gregg A. Esenwein.
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$700; for calendar year 2009 the credit was scheduled to be $800 and for calendar year
2010 the credit is scheduled to be $1,000. (Table 1 shows the actual values for the child
tax credit under current law and the values as enacted under the 2001, 2003, and 2004 tax
changes.)
The 2001 Act also extended the refundability of the child tax credit to families with
fewer than three children. For tax years 2001 through 2004, the credit was made
refundable to the extent of 10% of a taxpayer’s earned income in excess of $10,000.
Refundability was scheduled to increase to 15% for 2005 and later years. The $10,000
threshold was indexed for inflation beginning in 2002. In addition, the 2001 Act
permanently allowed the child tax credit to offset alternative minimum tax liability. All
of the provisions of the 2001 Act, however, are scheduled to sunset at the end of 2010.
The Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA) increased
the child tax credit to $1,000 for tax years 2003 and 2004. In the summer of 2003, the
$400 increase in the credit for tax year 2003 was paid, via a check from the Treasury
Department, in advance to many families who qualified for the child tax credit. The
checks were distributed based on information contained on taxpayers’ 2002 income tax
returns. The JGTRRA provisions were scheduled to expire after 2004 and the child tax
credit would have reverted to its scheduled level under the EGTRRA provisions, $700
in 2005.
Table 1. The Child Tax Credit Under Current Law and as Enacted
Under the 2001, 2003, and 2004 Tax Acts
1998
1999
2000
2001
2002
2003
2004
Actual
$400
$500
$500
$600
$600
$1,000
$1,000
WFTRA (2004)
—
—
—
—
—
—
—
JGTRRA (2003)
—
—
—
—
—
$1,000
$1,000
EGTRRA (2001)
—
—
—
$600
$600
$600
$600
2005
2006
2007
2008
2009
2010
2011
Current law
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$500
(scheduled)
WFTRA (2004)
$1,000
$1,000
$1,000
$1,000
$1,000
—
—
JGTRRA (2003)
—
—
—
—
—
—
—
EGTRRA (2001)
$700
$700
$700
$700
$800
$1,000
—
In September 2004, Congress passed the Working Families Tax Relief Act of 2004
(WFTRA). This act extended the $1,000 child tax credit through 2009 (for 2010, the
EGTRRA provisions apply and the child tax credit will remain at $1,000). In addition,
WFTRA accelerated, to 2004, the increase in the refundability of the child tax credit. For
2004 through 2010, the child tax credit will be refundable to 15% of a taxpayer’s earned
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income in excess of the applicable threshold. The 2004 Act also contained a provision
including combat pay in earned income for purposes of computing child tax credit
refundability.
Policy Issues and Recent Legislative Action
Three main issues have dominated recent policy discussions about the child tax
credit: (1) the refundabilty limits on low-income families, (2) the expiration, at the end
of 2010, of the EGTRRA expansion of and increases to the child tax credit, and (3)
concern over the effects of tax cuts on the budget deficit.
JGTRRA accelerated, to tax years 2003 and 2004, the scheduled increase in the
child tax credit from $600 to $1,000. However, it did not accelerate the increase in the
refundability of the child tax credit scheduled to take effect in 2005. (In 2005, the child
tax credit was scheduled to be refundable to the extent of 15% of a taxpayer’s earned
income in excess of a specified threshold.)
As a result, many low-income families did not benefit from the JGTRRA increase
in the amount of the child tax credit. For example, in 2003, a family filing a joint return
with one qualifying child and earned income of $16,500 would not owe federal income
taxes. They would, however, have received a refund of $600 for the child tax credit. The
$600 refund would have been the same as under prior law (10% of the excess of $16,500
earned income over the $10,500 threshold). Hence, even though the 2003 Act increased
the child tax credit to $1,000, this family saw no increase in their refundable child credit
compared to prior law. If the refundability of the child tax credit had been accelerated to
15%, then this family would have received a refundable child tax credit of $900 in tax
year 2003 (15% of the excess of $16,500 earned income over the $10,500 threshold).
The fact that JGTRRA did not increase the refundability of the child tax credit
caused some controversy in Congress. Although additional legislation accelerating the
increase in refundability was contained in bills passed in 2003 by both the House and the
Senate, it was not enacted into law. Congress addressed this issue again in 2004 and, with
the passage of the WFTRA, increased refundability to 15% effective in 2004.
The second policy issue facing Congress concerns the sunset provisions of EGTRRA
and the child tax credit. All the tax provisions in EGTRRA will sunset (revert to prior
law levels) after 2010. This means that, absent legislative action, in 2011, the child tax
credit will fall to $500 per qualifying child, the credit will no longer be refundable for
families with fewer than three children, and the child tax credit will not be allowed in full
against a taxpayer’s alternative minimum tax.
Finally, a counterweight to the congressional desire to provide continued tax relief
to families is congressional concern over the current and projected size of the federal
budget deficit. The revenue costs associated with extending the child tax credit changes
beyond 2010 would be approximately $33 billion a year.
To date, the following bills affecting the child tax credit have been introduced in the
110th Congress.
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S. 218. Introduced January 9, 2007, by Senator Olympia Snowe. This bill would reduce
the threshold for calculating the refundable portion of the child tax credit to $10,000
effective in taxable years beginning after December 31, 2006.
S. 614. Introduced February 15, 2007, by Senator Charles Schumer. Among other things,
this bill increases the credit to $2,000 for the first year in which the child qualifies for the
credit.
S. 816. Introduced March 8, 2007, by Senator Sam Brownback. Among other things, this
bill makes the $1,000 child credit permanent and adjusts the credit for inflation starting
in 2008.
H.R. 411. Introduced January 11, 2007, by Representative Mario Diaz-Balart. This bill
would make the 2001/2003 changes in the child tax credit permanent.
H.R. 431. Introduced January 11, 2007, by Representative EdolphusTowns. This bill
would make residents of Puerto Rico eligible for the refundable portion of the child tax
credit.
H.R. 1406. Introduced March 8, 2007, by Representative Brad Ellsworth. This bill
increases the credit to $2,000 for the first year the child is claimed as a qualifying child.
H.R. 1421. Introduced March 8, 2007, by Representative Lee Terry. Among other
things, this bill makes the $1,000 credit permanent and increases the credit for inflation
after 2007.
H.R. 2126. Introduced May 3, 2007, by Representative Christopher Carney. This bill
increases the percentage by which the credit is refundable and lowers the refundability
threshold.
H.R. 2902. Introduced June 28, 2007, by Representative Thomas Allen. Among other
things, this bill increases the credit to $2,000 for the first year the child is claimed as a
qualifying child.
H.R. 2983. Introduced July 10, 2007, by Representative Anthony Weiner. Among other
things, this bill makes the $1,000 credit permanent and also increases the child tax credit
for years prior to 2011.
H.R. 3135. Introduced July 23, 2007, by Representative Dave Weldon. This bill makes
the $1,000 credit permanent and adjusts the credit for inflation starting in 2007.
Analysis
Economic theory does not provide an answer to the question of how the costs of
child rearing should be accounted for under an income tax. Proponents of an increased
child tax credit argue that the current credit is not large enough to offset the costs of
raising a child. In this view, children should be considered an investment in the future
and as such the costs associated with child rearing should be deducted as are other
investment costs. Critics argue, however, that it was never intended that the federal
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income tax provide offsets for the full financial responsibility of raising children. Indeed,
some even argue that the decision to have children represents a choice of how to consume
one’s income and therefore the costs of raising children should not be a consideration
when assessing income taxes.
Historically, the federal income tax has differentiated among families of different
size through the combined use of personal exemptions, dependent care credits, standard
deductions, and the earned income tax credit. These provisions were modified over time
so that families of differing size would not be subject to federal income tax if their
incomes fell below the poverty level.4
The child tax credit represents a departure from past policy practices because it is
not designed primarily as a means of differentiating between families of different size at
or near the poverty threshold, but rather is designed to provide general tax reductions to
middle and upper income taxpayers with dependent children under the age of 17.
On occasion, Congress has debated the merits of increasing the AGI phase out limits
on the child tax credit. However, increasing the AGI phase-out limits for the child tax
credit would significantly expand the tax benefits of the child tax credit and provide tax
reductions to much higher-income families than the original 1997 legislation.
On the other hand, increasing the refundability percentage from 10% to 15% of
earned income and the inclusion of combat pay for purposes of calculating refundability
provided only modest tax benefits to taxpayers at the bottom of the income spectrum.
Families with income below $11,300 receive no tax benefits from the refundable child tax
credit. In fact, since the earned income limit for refundabilty is indexed for inflation,
each year it will increase in nominal terms, and more low-income families will lose tax
benefits from the refundable child tax credit.
The empirical evidence suggests that for families with children (except those
families in the highest income quintile), the overall federal tax burden fell between 1979
and 2000.5 The 2001, 2003 and 2004 tax acts (with their reductions in marginal income
tax rates, reductions in taxes on capital gains/dividend income, and marriage penalty tax
relief) continued the trend of reducing federal taxes on families, especially high-income
families filing joint returns.
4 For more information on the tax treatment of different family types, see CRS Report 98-653,
The Marriage Penalty and Other Family Tax Issues, by Jane G. Gravelle.
5 Congressional Budget Office, Effective Federal Tax Rates: 1997 to 2000, Aug. 2003.