Tax Credits
Federal and state refundable tax credits have the potential to dramatically reduce child poverty, as shown by the temporary expansion of the federal Child Tax Credit (CTC) in 2021. Congress and state legislatures can fill the gap with new and expanded tax credits that benefit families.
The federal Child Tax Credit (CTC) provides families with cash through tax refunds or offset income tax liabilities to help manage the cost of raising children. The program was first enacted in 1997 and has been expanded multiple times since. Under current law, it is worth up to $2,000 per eligible child up to age 17, though families with little or no income are not eligible for the full value of the credit. The program was temporarily expanded in 2021 and while the expanded CTC dramatically reduced child poverty, Congress has not yet renewed the expansion.
In 2021, Congress temporarily expanded the CTC as a part of the American Rescue Plan Act (ARPA). The expansion made three key improvements to the program:
- The maximum credit amount increased from $2,000 to $3,600 per child under age 6 and to $3,000 per child aged 6-17.
- The credit became “fully refundable,” meaning children whose parents had low or no earnings could receive the full value of the credit.
- Half of a family’s credit was paid out monthly over a six-month period and half when the family filed their 2021 taxes.
Thanks to the combined effects of these improvements, the expanded Child Tax Credit cut child poverty by 46 percent in 2021, according to Census Bureau data. The expansion kept about 2.1 million children above the poverty line and reduced differences in poverty rates between children of all races and ethnicities.
Unfortunately, the expanded CTC expired and the program reverted its pre-ARPA form in January 2022. Almost immediately after monthly CTC payments stopped, the child poverty rate snapped back to pre-ARPA levels. Without full refundability, an estimated 19 million children again receive less than the full credit, or no credit at all, because their families earn too little.
The expanded CTC had wide-ranging effects on child poverty, family economic security, food security, and more. For more information on the effects of the expanded CTC and the need to make the expansion permanent, see our summary of recent CTC research.
Under current law, the CTC is worth up to $2,000 per eligible child up to age 17. The existing program substantially reduces child poverty–it kept 2.3 million children above the poverty line in 2018–but its anti-poverty effects are limited due to rules that exclude millions of families:
- The CTC has an earnings requirement. A family that earns less than $2,500 receives no credit, and families with low earnings receive only a partial credit.
- The value of the credit is lower for families with low or moderate incomes who don’t owe as much in federal taxes. Families are only eligible to receive a refund for the portion of the credit that exceeds their income tax bill, and the value of that refund is currently capped at $1,500 per child, far short of the $2,000 credit per child available to families with higher incomes. For example, a single mother with two children who earns $20,000 would receive roughly $1300 per child as a refund under current law.
- Millions of children are excluded from the program because they do not have a Social Security Number.
- Hundreds of thousands of children are excluded from the program because of complicated eligibility rules. Children who live with caregivers who are not a close relative or adoptive parent aren’t eligible for the federal CTC, nor are those who do not spend at least six months in a single household in a given year.
In all, about 19 million children in families with little or no earnings are excluded from the full value of the CTC due to earnings requirements alone. The CTC has the potential to dramatically reduce childhood poverty and food insecurity, but that potential will not be realized until eligibility for the program is substantially expanded at the federal level or state programs are established or expanded to fill in the gaps.
Congress has an opportunity to renew the expanded CTC that lifted millions of children and their families out of poverty in 2021. And while they don’t have the authority to expand tax programs on their own, the Treasury Department and the IRS have the opportunity to improve access to tax programs to ensure that families are able to get the tax benefits to which they are entitled.
Lawmakers from both political parties have proposed expanding the CTC. These proposals range from a full extension of the 2021 American Rescue Plan Act to a plan that would expand the CTC generously but offset the cost by cutting important tax benefits for low- and moderate-income families to plans that would expand the credit but impose income and other eligibility requirements and leave out families with low or no income entirely.
Short of full renewal of the expanded CTC, there are several possibilities for bipartisan changes to the tax code that could improve future administration of the CTC. Congress could expand tax credit eligibility for children living with non-family caregivers, streamline the adjudication of competing claims for credits, and ensure fairness in the determination of penalties for improper CTC and Earned Income Tax Credit claims.
The IRS, Treasury Department, and White House have an opportunity to make administrative improvements to the tax filing system to improve current and future access to the CTC. Streamlining the tax-filing process and improving IRS capacity to serve taxpayers will reduce barriers for families, especially those with low incomes, who are eligible to receive the CTC.
Since the expiration of the expanded federal CTC, many states have moved toward adopting or expanding their own CTCs. Several states currently have some form of child credit on the books to boost family incomes, and in 2023, legislation has been introduced to create or expand CTCs in more than a dozen states. A list of state CTC bills introduced this year can be found here.
The state credits vary widely in terms of value and eligibility. In most states, the credits are refundable, meaning that taxpayers receive a refund for the portion of the credit that exceeds their income tax bill. In a few states, however, the credits are nonrefundable, meaning they cannot be accessed by families with low or moderate incomes who may have little state income tax liability.
Eligibility requirements also vary from state to state. Some states simply match federal eligibility requirements, while others place additional limits on the credit based on age or family income. Unlike the federal credit, most state credits are inclusive of immigrant families who claim children with Individual Tax Identification Numbers (ITINs) rather than only allowing Social Security Numbers.
A full description of existing state-level CTC programs can be found here, or at the link at the bottom of this page.
These state efforts are a meaningful step toward filling in the gaps left by the expiration of the federal expanded CTC and ensuring the economic security of children across the country. For more information about how state lawmakers can reduce child poverty in their states by enacting and enhancing state Child Tax Credits, see this report from the Institute on Taxation and Economic Policy.