Child Tax CreditTAKE ACTIONUse our online alert to urge Congress to invest in low-income tax credits See our Low-Income Tax Credits Recent Developments Page Learn more with our Low-Income Tax Credits PowerPoint Presentation Expand the Child Tax Credit for More Low-income Families in 2010The Child Tax Credit (CTC) is a partially, refundable tax credit for families with children. The purpose of the CTC is to help low and middle income families with the cost of raising children. RESULTS thanks Congress for making meaningful and significant changes to the CTC over the last decade. These changes have allowed more low-income households access to income they would not otherwise have; income that helps them provide food, clothing, shelter, and other necessities to their children. See below for more background on the CTC. However, their work, and thus ours, is not done. The current CTC, while a vast improvement over previous law, still excludes America's poorest families (those who earn less than $3,000 per year). Also, the credit is only partially refundable thus requiring low-income families to earn more to receive the full credit as a refund. Finally, the current $3,000 income eligibility threshold and $1,000 credit amount are only temporary. Unless Congress acts, the threshold will jump to over $12,000 and the maximum credit will drop to $500 in 2011, hurting millions of low-income children and their families. Work towards improving the tax credit is underway. In December 2009, the House passed the Jobs for Main Street Act of 2010 (H.R. 2847). The bill is focused on important elements needed to spur job growth, and includes a refundable CTC available to families starting with their first dollar of earnings. At a cost of $2.3 billion, it would remove the $3,000 threshold for 2010, cut taxes for 16 million families, and make the CTC available to all low-income working families with children in 2010. It also provides that such increases in refunds do not count in determining eligibility or benefits for federal or federal/state programs such as SNAP (food stamps) or TANF. We urge the Senate to follow suit in 2010. RESULTS supports the following expansions of the Child Tax Credit as part of tax legislation in 2010:
RESULTS and its allies will continue to work to see that these changes are enacted into law. At a minimum, Congress must act in 2010 to:
President Obama's FY 2011 Proposed Budget released in February, 2010, would permanently retain the $3,000 earnings threshold for the refundable portion of the child tax credit. The cost over ten years would be $83.1 billion. In order for this sizeable enhancement to become law, Congress will have to find ways to raise revenues. The President's budget would do that. You can read more about it on the Center for Budget and Policy Priorities' website. BackgroundHow the Child Tax Credit WorksThe Child Tax Credit (CTC) is a partially-refundable tax credit designed to lessen the impact of income taxes for families raising children. Unlike a tax deduction (like mortgage interest), which reduces your taxable income, a tax credit is subtracted directly from the taxes you owe. The CTC is the largest tax code provision benefiting families with children, distributing about $45 billion to 31 million families in 2007. Persons with at least one qualifying child who file federal tax returns can get a CTC of up to $1,000 for each child under 17 years old. To qualify for the CTC, the tax filer’s earned income must be above a certain threshold ($3,000 in 2009). The credit is phased in as earned income goes above the threshold, until the maximum $1,000 credit is reached. The credit is then gradually phased out at very high income levels, and there is no credit available to those with incomes above $75,000 for single persons and $110,000 for married couples.
However, the CTC is only partially refundable. Unlike the EITC, where the tax filer simply gets the difference between the EITC and what his/her owes in income tax, the low-income CTC family typically only gets part of its credit back. The CTC is first used to reduce or eliminate the family’s income tax liability. After that, if there is any credit remaining, the family will receive a refund equal to the lesser of: (1) the amount of the family’s CTC that remains, or (2) 15 percent of the family’s earned income over the CTC income threshold. Here is an example: A single mom with one child earning $5,000 in 2009 will have $1,000 remaining of her CTC after taxes (she owes no income tax because her income is too low). Her refund will be the lesser of her remaining credit ($1,000) or 15 percent of her income above the minimum income threshold (15% × [$5,000 − 3,000]), which is $300. Since $300 is less than $1,000, her refund is $300. Reforms 2001-2009When it was first enacted, the CTC was non-refundable for families with one or two qualifying children. These families could only apply the credit toward reducing any federal income tax liability they had (before taking the EITC). If a family did not owe any taxes, they would not be eligible for the credit. In 2001, the CTC joined the EITC as a source of income support for low-income working families with children. Thanks in part to the efforts of RESULTS and its allies, the CTC was doubled to $1,000 per child and made partially refundable for families earning over $10,000.* Making the CTC partially refundable was an especially important reform because it made the credit available to lower-income families, as outlined above. Despite this expansion, the CTC still excluded many low-income children from eligibility. With the income eligibility threshold set at $10,000, a family that earned less than that was deemed “too poor” to get the credit. The 2008 Tax Policy Center Briefing Book reported that in 2007, 27 percent of children whose parents work lived in families who received less then the full credit because their parents earned too little. “Forty percent of these children are in families that get no credit at all because their earnings fall below the refundability threshold.” Furthermore, the threshold was adjusted upward for inflation each year. By 2008, it had risen to $12,050. This became yet another barrier to benefits for low-income families. First, for those who fell below the threshold, the fact that it went up each year made it more and more difficult to become eligible, considering that low-income wages normally rise less than the rate of inflation, if at all. Second, for low-income families who were eligible for the CTC, because their refund was based on the family’s income above the threshold (see above), if the threshold went up but their income did not, their refund got smaller. RESULTS and our allies worked to remedy this problem. RESULTS advocated for lowering the income eligibility threshold to zero and making the credit fully refundable. This would not only allow the lowest income families to claim the credit (remember, the credit is designed to help raise their children) and allow them to get a larger refund, it would also simplify the process significantly. In 2008, RESULTS and our allies pushed for these changes and achieved a partial success. In October 2008, Congress passed the Wall Street bailout legislation. Included in that bill was a meaningful improvement to the CTC. The bill lowered the income eligibility threshold from $12,050 to $8,500 for the 2008 tax year. It is estimated that 12.9 million low-income children will benefit from this change — 2.4 million are now eligible and 10.5 million more will receive a larger credit. Unfortunately, this change only applied to tax year 2008. In 2009, the eligibility threshold would jump to $12,550, thus eliminating all those newly eligible children. RESULTS again pushed for more expansion of the CTC in the economic recovery bill Congress and President Obama proposed in early 2009, the American Recovery and Reinvestment Act (ARRA). Again, we were successful; the final bill lowered the threshold to $3,000 for tax years 2009 and 2010. The Center on Budget and Policy Priorities estimates this will open up the CTC to nearly 3 million new children and expand the credit for 10 million more. In 2010, RESULTS will work to not only make these changes permanent, but to expand them as outlined above. |
The CTC is also refundable, meaning that even if the worker’s CTC is higher than what he/she owes in income tax, the worker can get a partial refund of the difference. This money can be used to pay bills, attend school, buy a car, build assets, etc.