The federal Child Tax Credit (CTC) helps many low-income and middle-income working parents make sure that their kids grow up strong, but key improvements to the CTC are set to expire in 2017. The CTC prevented 1.6 million kids nationwide from living in poverty in 2012[i], but critical anti-poverty programs like this might be overlooked in favor of permanent tax cuts that primarily benefit high-income families.
The House Ways and Means Committee passed legislation this April which would permanently pass six major corporate tax cuts without plans to offset the cost. Making these temporary tax cuts permanent would undo much of the recent progress in federal deficit reduction, and abandons credits that benefit low-income working families across the nation. If the improvements to the CTC and the similar Earned Income Tax Credit (EITC) are allowed to expire, 140,200 Arkansans (including 81,900 children) would fall into or deeper into poverty.[ii]
The CTC boosts parent employment because only working families are eligible for the credit, and families get a bigger credit for every extra dollar they take home. The graph below shows an example of the CTC relief that would be provided to a family with two parents and two children for incomes between $0 and $20,000 a year. The CTC works by providing families with a credit equal to 15 percent of their income that exceeds $3,000 and then increases with each extra dollar earned until it reaches its maximum value of $1,000 per child.[iii] The tax credit eventually tapers off for families at much higher income levels (couples earning over $110,000 a year get a smaller and smaller credit the higher their incomes go until they earn $150,000 a year and are no longer eligible for the credit).[iv]
Families are able to subtract their credit amount from the annual taxes they owe, allowing them to keep more of the money they earn.[v] If the credit a family earns is more than that family’s annual tax share, they receive the balance as a credit. That is the part that makes this credit “refundable.” The refundable aspect of this credit makes sure that even families with extremely low incomes, who pay little-to-no federal income taxes but still pay payroll taxes, also get support to help raise their children.[vi] The CTC helps working families right away by helping to offset the cost of child-rearing and the effects of immediate aid by the CTC are even shown to improve the health outcomes of infants.[vii] The benefits of the CTC also impact parents and their children years down the road; parents are more likely to increase their employment, and kids are more likely to go to college and get higher paying jobs. [viii]