The United States federal child tax credit (CTC) is a partially-refundable tax credit for parents with dependent children. It provides $2,000 in tax relief per qualifying child, with up to $1,400 of that refundable (subject to a refundability threshold, phase-in and phase-out). In 2021, following the passage of the American Rescue Plan Act of 2021, it was temporarily raised to $3,600 per child under the age of 6 and $3,000 per child between the ages of 6 and 17; it was also made fully-refundable and half was paid out as monthly benefits. This reverted back to the previous in 2022. The CTC is scheduled to revert to a $1,000 credit after 2025.
The CTC was estimated to have lifted about 3 million children out of poverty in 2016. In 2021, a Columbia University study estimated that the expansion of the CTC in the American Rescue Plan Act reduced child poverty by an additional 26%, and would have decreased child poverty by an additional 40% had all eligible households claimed the credit. The expansion also substantially reduced food insufficiency. Research indicates that cash transfers to families, like the refundable portion of the CTC, leads to improved math and reading test scores, a higher likelihood of high school graduation, higher college attendance, and long-term increases in income for both parents and children. Studies have also determined that the CTC increases labor force participation among low-income parents.
The CTC was created in 1997 as part of the Taxpayer Relief Act of 1997. Initially a small $500 per child nonrefundable credit, it was progressively made larger and extended to more taxpayers through subsequent legislation. In particular, it was temporarily raised to $1,000 per child and made refundable, subject to a phase-in, by the Jobs and Growth Tax Relief Reconciliation Act of 2003; that raise was made permanent by the American Taxpayer Relief Act of 2012; the credit was temporarily raised to $2,000 per child, with up to $1,400 of that refundable, and the number of taxpayers eligible substantially expanded by the Tax Cuts and Jobs Act of 2017; and finally the credit was expanded substantially and made fully available to very low-income people for one year by the American Rescue Plan Act of 2021.
Background
A tax credit enables taxpayers to subtract the amount of the credit from their tax liability. In the United States, to calculate taxes owed, a taxpayer first subtracts certain "adjustments" (a particular set of deductions like contributions to certain retirement accounts and student loan interest payments) from their gross income (the sum of all their wages, interest, capital gains or loss, business income, IRA and pension income, Social Security income, rents, royalties, and unemployment compensation) to determine their adjusted gross income (AGI). They then subtract from their AGI the larger of the standard deduction or itemized deductions, as well as the deduction for qualified business income, to determine their taxable income. They then apply the relevant tax rates to their taxable income (See How do federal income tax rates work? for more information on income tax brackets). Finally, they subtract any tax credits they are eligible for from their tax liability to determine the amount of tax that they owe. This is summarized by the equation below:
There are two basic types of tax credits: non-refundable tax credits and refundable tax credits. A tax credit is non-refundable if the credit can only be used to reduce tax owed to $0. It is refundable if it can be used to produce a negative tax liability, which will be refunded to them, i.e. they will receive a tax refund that is larger than any taxes they have already paid. For example, if a taxpayer with a tax liability before tax credits of $500 were eligible for a $2,000 refundable tax credit, they would receive a tax refund that is $1,500 larger than any taxes they have already paid. If the $2,000 credit was non-refundable, by contrast, they would only be able to reduce their taxes owed to $0 and would not receive a refund for the remaining $1,500 of the credit.