Child Tax Credit

Basic Concept:

  • The CTC is a tax reduction based on earned income that gives an individual up to a $2,000, per dependent, reduction in taxes owed (or refund up to $1,400).

  • Although the CTC is now refundable, refunds are capped by 15% of earned income that exceeds $2,500 (i.e. to qualify for the full refund of $1,400, filer must have earned income of $11,830)

  • Some states also offer state-level CTC that matches federal tax credit

Eligibility Requirements: 1

  • To Earn CTC

    • Filer must have earned income at or above $2,500

    • Dependent must be under age 17 at the end of the tax year

  • Dependent is a daughter/son, stepchild/foster child/adopted child, or (step/half)brother/sister

    • Dependent can also be a direct descendant of any above (ex: grandchild, niece/nephew)

    • Dependent did not use their own money for more than half of their living expenses

    • Child must be claimed as a dependent on filer’s federal tax return

    • Child/dependent must be a US citizen, a U.S. national/resident alien

    • Child/dependent must have a Social Security Number

    • Child/dependent must have lived with filer for more than half of the tax year

    • Limits of CTC 

      • Single filers become eligible for only a partial credit once they reach adjusted gross income of $200,000; for joint filers (married couples) the level is $400,000

      • More specifically, maximum credit amount is reduced by 5% when the recipients adjusted gross income (AGI) reaches $200,000 for single filers and $400,000 for joint filers.

      • Single filers are no longer eligible for the CTC at an adjusted gross income level of $240,000; joint filers are no longer eligible at level of $440,000

Program Participants:

  • About 90% of families with children will receive an average CTC of $2,380 in Child Tax Credits2

Benefits:

  • Families/guardians can receive up to a $2,000 reduction in taxes owed

  • If CTC brings taxes owed to $0, and family makes more than $2,500 a refund is issued

  • The second, third, and fourth quintiles of the income quintile distribution of the US receive the CTC (94%, 98%, 99%, respectively)3

Shortcomings:

  • Families that earn the least (lowest income quintile) are least likely to benefit due to lack of earned income 

  • A little under 3/4 of families in the lowest income are eligible for CTC, receiving an average benefit of $1,280.

  • CTC based on pre-requirements helps the people making the least amount of money

CTC Distribution: 4

State & Local CTCs: 5

  • Only 6/50 (CA/CO/ID/NY/NC/OK) states have state-level Child Tax Credit tax options

  • Washington, D.C., Maryland, and Virginia all do not have state-level options

  • 2/6 have refundable options

  • 3 states (CA/ID/NC) have formulas for state-level options based on x amount per dependent

  • 3 states (CO/NY/OK) have formulas for state-level options based on x% of federal credit

Child and Dependent Care Tax Credit (CDCTC)

Basic Concept:

  • Tax reduction, similar to CTC, that allows for anywhere between 20%-35% of child care/adult care to be deducted up to $3,000 (for one child) or adult and $6,000 (for more than one) but must have paid someone else for that care

    • Child must be under 13

    • Adult (can include spouse) must be listed as dependent, if that person cannot take care of themself and has lived in your home at least half the year 

Eligibility Requirements: 6

  • To earn credit, must pay someone for care; person receiving payment cannot be parent of child (i.e. cannot receive credit for paying an ex-wife/husband for taking care of your child with that person), someone listed as a dependent on your tax return, your own child age 18 or younger

  • To earn credit, must have earned income; non-work income (investment profits) does not qualify as eligible

  • To earn credit, you must have paid for the care in order to work or look for work (for purposes of this credit being a full-time student qualifies as “working”)

  • To earn this credit, you must file jointly if you are married

  • To earn this credit, you must provide pertinent information about the caregiver

Program Participants:

  • The Urban Brookings Tax Policy Center estimates that in 2020, 12% of families with children will benefit from from the CDCTC 7

Benefits:

  • Families that fall in moderate income levels are able to use the CDCTC (if qualified) as a way to reduce taxes owed

  • Some low income families are able to also use the CDCTC as a way to reduce the amount owed based off of federal income tax if eligibility is met

Shortcomings: 8

  • Due to its nonrefundable status, the CDCTC is only beneficial if a family owes a sizable amount in federal income tax; therefore, Low- and moderate-income families can only make modest use of this

  • The CDCTC is reduced even more because of the new provisions of the CTC

  • The CTC now allows for families to have more money reduced from their taxes, with even more of it being refundable now (2016 TY $1,000 total/up to $1,000 refundable; 2019 TY $2,000 total/$1,400 refundable)

  • Theoretically, families that owe more in federal income tax can use CTC provision and pay off up to $999 of income tax and then be refunded the rest (if qualified)

  • While families cannot be refunded any remainder under CDCTC

  • Families may not be eligible for child care costs because one parent does not work/go to school

  • Those in the lowest income quintile are estimated to have the highest child care expenses, yet not be able to benefit from the CDCTC because it is nonrefundable 9