The federal government and seven states offer child tax credits to enhance the economic security of families with children, particularly those in lower- to middle-income brackets. The value of the tax credits is determined primarily by income level, marital status and number of dependent children. It’s estimated that the federal child tax credit lifts nearly 2 million children out of poverty each year.
Federal Child Tax Credit
Historically, the federal child tax credit has had bipartisan support. It was established as a part of the 1997 Taxpayer Relief Act. Eligible recipients subtract the credit amount from their owed federal income taxes. Originally, the tax credit was $400 per child under age 17 and nonrefundable for most families. In 1998, the tax credit was increased to $500 per child under age 17. The tax credit amount increased again and was made refundable in 2001 to coordinate with the Earned Income Tax Credit. The refundable portion is called the Additional Child Tax Credit.
By 2009, the income thresholds for the child tax credit and earned income tax credit no longer aligned. The American Taxpayer Relief Act of 2012 increased the value of the federal child tax credit to $1,000 and increased the income threshold to correspond with the earned income tax credit. The Tax Cuts and Jobs Act of 2017 doubled the tax credit to $2,000 and made limits to the refundable amount of up to $1,400 per child. It also introduced phase out thresholds and rates for higher-income taxpayers. The act is temporary and will expire on Dec. 31, 2025.
American Rescue Plan Act of 2021
During the COVID-19 pandemic, many low- and moderate-income families experienced unemployment and lack of child care options, further compounding economic difficulties. The American Rescue Plan Act of 2021 (ARPA) expands the child tax credit from $2,000 to $3,600 per child under age 6 and $3,000 per child up to age 17 (rather than the previous limit of age 16). The size of the benefit will gradually diminish for single filers earning more than $75,000 per year and married couples earning more than $150,000 a year. ARPA temporarily makes the tax credit fully refundable and paid out in monthly payments for the first six months, rather than once per year. The federal child tax credit will revert to previous payment levels for tax year 2022 unless extended by Congress.
Beginning July 15, 2021, 88% of American families with children (39 million households) received advance payments. Eligible families who filed taxes in 2019 or 2020 qualified for automatic monthly payments through Dec. 31, 2021. Families not required to file taxes based on income level can still receive the tax credit through a non-filer process and are required to enroll by Nov. 15, 2021. If the deadline is missed, families can claim the tax credit when filing their 2021 income tax return. The White House and the Department of the Treasury, with Code for America, created a bilingual and mobile-friendly sign-up tool at GetCTC.org to asset families to file a simplified tax return.
State and local governments can use ARPA funds to assist families with navigating and applying for federal, state and local public benefits, including the federal child tax credit. The Department of the Treasury issued an interim final rule guiding the use of ARPA Coronavirus State and Local Fiscal Recovery Funds to support public benefits navigators and additional resources.
American Families Plan Proposal
The American Families Plan of 2021 is a $1.8 trillion proposal from the Biden administration that includes extensions to the child tax credit. If approved by Congress, the proposal would extend enhancements to the federal child tax credit through 2025 and permanently establish it as fully refundable. The American Families Plan would create a system for the tax credit to be received monthly, rather than after taxes are filed.
State-Level Child Tax Credit
Seven states have enacted a child tax credit in addition to the federal credit. Four of the seven states (California, Colorado, Maryland and New York) have made the child tax credit refundable. California, Idaho, Maine and Maryland established a fixed limit for the tax credit ranging from $205 to $1,000 per qualifying child. Colorado developed a tiered system based on income levels and is calculated by a percentage of the federal child tax credit.
Eligibility requirements differ among states’ child tax credits. Oklahoma limits the child tax credit to families earning less than $100,000 per year. Colorado and New York have age restrictions for qualifying children (under age 6 in Colorado, at least age 4 in New York). Maryland's child tax credit is specifically for the lowest income families and restricts eligibility to those earning $6,000 or less per year. Maryland also restricts eligibility to families with children with disabilities. All seven states allow filers to claim both the state and federal child tax credit.
Similar to the federal child tax credit, state child tax credits are a strategy for improving family economic stability and often have bipartisan support. The COVID-19 pandemic created or compounded economic burdens for many families, and recent legislative trends suggest states are increasingly considering child tax credits. Since 2019, nine states (Connecticut, Hawaii, Illinois, Iowa, Kansas, Michigan, Missouri, Oregon and West Virginia) have introduced legislation to create state-level child tax credits. Additionally, California and New York have both introduced legislation to expand their current state child tax credits.