By Kevin Allec Arreola
Each year, millions of American families claim the Child Tax Credit, which has undergone significant changes in the past decade. With some of those changes set to expire at the end of 2025, this post will explain what the child tax credit it, who is eligible, and what the program might look like in the future.
What is the Child Tax Credit?
The Child Tax Credit (CTC) was initially passed in the Taxpayer Relief Act of 1997.The CTC is essentially a tax credit for those who have a dependent under the age of 17, which helps lower a taxpayer’s bill on a dollar-by-dollar basis. The CTC was originally a non-refundable $500 per child credit but was increased to $1,000 and made partially refundable under the Economic Growth and Tax Relief Reconciliation Act of 2001. A non-refundable credit is a credit that can only be refunded up to the amount of the taxpayer’s tax liability. By contrast, under a refundable tax credit the taxpayer receives the full value of the tax credit. For example, if a taxpayer receives a non-refundable tax credit worth $1,000 but only owes $500 on their tax bill, they will only receive $500 of the tax credit, which would be applied to pay the tax owed. In the same situation under a refundable tax credit, the taxpayer would receive the full value of the $1,000 credit and would thus have their tax bill of $500 paid off and a refund of $500 directly to them. Under a partially refundable tax credit (such as the Child Tax Credit), the taxpayer receives a refundable credit portion and a non-refundable portion.
The 2017 Tax Cuts and Jobs Act increased the Child Tax Credit from $1,000 to $2,000 and the refundable portion of the credit was increased to $1,400. However, unless Congress passes another tax bill, these changes will expire by the end of 2025.
What changes may occur after 2025?
In order to understand how the Child Tax Credit may change, it is necessary to understand the current state of the CTC.
First, like with other tax benefits, a taxpayer must meet certain requirements before they can claim the Child Tax Credit. To qualify, a taxpayer must have a qualifying child.
To have a qualifying child, the taxpayer must have a dependent:
(1) under the age of 17 by the end of the year;
(2) that is their daughter, son, stepchild, eligible foster child, brother, sister, stepsibling, half-sibling, or descendant;
(3) must have provided no more than half of their own financial support;
(4) lived with them for more than half the year;
(5) be claimed as their dependent on the taxpayer’s tax return;
(6) the taxpayer must not have filed a joint return with their spouse or have filed it only to claim a refund of withheld income tax; and
(7) the dependent must be a U.S. citizen, U.S. national, or a person who is a U.S. citizen or a foreign national who meets either the “green card” or “substantial presence” test.
Under the current Tax Cuts and Jobs Act changes, the Child Tax Credit was increased from $1,000 to $2,000, with the first $1,400 being refundable. The $1,400 refundable credit means that the taxpayer can receive up to $1,400 even if they don’t owe any tax. Additionally, the income thresholds were raised to $200,000 for single parents and $400,000 for married couples. Income thresholds determine how much a taxpayer could earn for the year before they no longer qualify for the CTC. At the end of 2025, these changes will expire, and unless Congress acts, the CTC amount could drop back down to $1,000 and the income threshold will return to $75,000 for single parents, and $110,000 for married couples. Lastly, the refundable credit portion will be lowered from $1,400 to $1,000.6
What will happen to the Child Tax Credit beyond 2025?
At this point, it is unclear whether Congress will allow the CTC changes to expire. However, prior to Donald Trump’s re-election, Republicans stated that they favored extending the current CTC amount of $2,000 and the current income thresholds ($200,000/$400,000 for single/married couples respectively).7 Democrats also expressed support for the CTC expansion made under the 2021 American Rescue Plan Act which increased the Child Tax Credit to $3,000 for older children and $3,600 for younger children. Thus, the current Child Tax Credit may likely be continued beyond 2025.
Additional background
The Tax Cuts and Jobs Act (TCJA) is a bill that was passed in 2017 and made significant changes to the tax code that affects millions of Americans.1 This tax bill was one of the biggest changes in three decades to the tax code and impacted taxpayers and businesses alike. The TCJA lowered the income tax for most individuals and brought changes to many other areas of the tax code, including changes to the Child Tax Credit.
Sources:
- https://taxfoundation.org/blog/tcja-individual-tax-cuts-expiring-2025/
- https://crsreports.congress.gov/product/pdf/R/R46502
- https://www.irs.gov/newsroom/tax-credits-for-individuals-what-they-mean-and-how-they-can-help-refunds
- https://www.irs.gov/credits-deductions/individuals/child-tax-credit
- https://www.hrblock.com/tax-center/filing/credits/child-tax-credit/
- https://taxfoundation.org/taxedu/glossary/child-tax-credit/
- https://tax.thomsonreuters.com/blog/what-to-know-about-tcja-expiration/