The Child Tax Credit: Proposed Expansion in the House Ways and Means Reconciliation Legislation (IN11613, Version 1)
Summary
Version 1 of a Congressional Research Service Insight, IN11613, dated February 24, 2021, on the one-year child tax credit expansion proposed in the House Ways and Means Committee's reconciliation legislation under S.Con.Res. 5. It notes interest in child allowances, including from the National Academy of Sciences and Senator Romney, and research suggesting a larger credit for low-income families would substantially reduce child poverty. Under current law the credit is up to $2,000 per child under 17, with a refundable portion of at most $1,400. The proposal would raise the maximum to $3,600 for children 0-5 and $3,000 for those 6-17, make it fully refundable, and phase the increase out above $75,000 for single filers and $150,000 for married couples. The Treasury would pay half the credit in monthly payments beginning July 1, 2021.
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INSIGHTi
The Child Tax Credit: Proposed Expansion in
the House Ways and Means Reconciliation
Legislation
February 24, 2021
In recent years, there has been increased interest in providing direct benefits to families with children to
reduce child poverty in the United States, sometimes in the form of tax benefits. The National Academy
of Sciences (NAS) included a “child allowance” as part of a package of policies to reduce child poverty
over 10 years. (Senator Romney has also proposed a child allowance.) Some research has suggested that
increasing the amount of the child tax credit that low-income families receive would substantially reduce
child poverty, boost future earnings, and potentially improve future health and education outcomes.
In the 116th Congress, there were several legislative proposals to expand the child tax credit, especially for
lower-income families that tend to receive little or no benefit from the current credit. In the 117th
Congress, a temporary one-year expansion of the child credit was included in legislation submitted by the
House Committee on Ways and Means in response to the reconciliation directives included in the budget
resolution (S.Con.Res. 5).
This Insight provides a summary of the current child tax credit and an overview of the proposal to expand
it included in the Ways and Means reconciliation legislation.
How is the child credit calculated under current law?
Under current law, the child tax credit allows eligible taxpayers to reduce their federal income tax liability
by up to $2,000 per qualifying child. A qualifying child is generally any dependent child who is under 17
years old. The credit is reduced in value, or phased out, by $50 for every $1,000 of income over $200,000
($400,000 for married couples who file joint tax returns).
If a taxpayer’s income tax liability is less than the maximum value of the child tax credit, the taxpayer
may be eligible to receive all or part of the difference as a refundable credit. The refundable portion of the
child tax credit—the amount which is greater than income taxes owed—is often referred to as the
additional child tax credit (ACTC) and is calculated using what is sometimes referred to as “the earned
income formula.” Under the earned income formula, the ACTC gradually increases, or phases in, as
earned income rises above $2,500. The maximum amount of the ACTC is $1,400 per qualifying child.
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IN11613
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CRS estimates that about one in every five taxpayers (19%) with a credit-eligible child have low incomes
that result in them receiving less than the maximum credit.
How would the child credit change under the Ways and Means
reconciliation legislation in the 117th Congress?
The Ways and Means reconciliation legislation would make several temporary changes (for 2021 only)
that would expand the child tax credit, primarily for low-income taxpayers. These changes include:
Expanding eligibility to 17 year olds: The bill would increase the maximum age for an
eligible child from 16 to 17.
Making the credit fully refundable: The bill would eliminate the ACTC phase-in based
on earned income and eliminate the ACTC cap of $1,400 per child. Hence, the child
credit would be “fully refundable” and available to otherwise eligible taxpayers with no
earned income.
Increasing the credit for low- and moderate-income taxpayers, with larger increases
for younger children: The bill would increase the maximum amount of the credit from
$2,000 per child to $3,600 per child for a young child (0-5 years old) and $3,000 per
child for an older child (6-17 years old), as illustrated in the figures below. Generally, this
increase in the maximum child credit of $1,600 per young child and $1,000 per older
child would gradually phase out at a rate of 5% as income exceeded specified thresholds
until the credit amount equaled the current-law maximum of $2,000 per child. These
thresholds are $75,000 for single filers, $112,500 for head of household filers, and
$150,000 for married joint filers. (The actual income level at which the credit phased
down to $2,000 per child would depend on the number and age of qualifying children. A
slightly different calculation may apply for large families.) The credit would then remain
at its current-law level and phase out when income exceeded the current-law threshold of
$200,000 ($400,000 for married joint filers).
These changes would increase the amount of the credit for low- and moderate-income taxpayers, while
higher-income families would generally receive the same benefit as under current law (unless they had an
eligible 17-year-old), as illustrated in the figures below.
The Joint Committee on Taxation estimates this temporary one-year expansion of the child credit would
cost $110 billion, mostly in FY2021 and FY2022 (these estimates also include the relatively smaller cost
of permanently extending the credit to residents of U.S. territories).
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How would the Ways and Means legislation advance the credit?
The legislation would direct the Treasury to issue half of the expected 2021 credit in monthly payments
beginning July 1, 2021 (the Treasury could issue the payments less frequently for the last six months of
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2021 if it deemed monthly payments were not feasible). Taxpayers would claim the remaining half of the
total 2021 credit when filing their 2021 income tax return in early 2022.
The amount of the payments advanced in 2021 would be estimated based on 2020 income tax data or, if
unavailable, 2019 income tax data.
Would taxpayers need to repay the advanced credit?
In cases where a taxpayer receives more in advanced payments than they are eligible for—due to changes
in income, filing status, or number of children—taxpayers would generally need to repay any excess
credit. Repayment could either reduce their 2021 tax refund or result in the taxpayer being required to
remit payment to the IRS.
In cases where an incorrect amount of the advanced payment was due to net changes in the number of
qualifying children, up to $2,000 per child of the advanced payment would be protected from repayment
(the “safe harbor” amount) for lower-income taxpayers. This safe harbor amount would gradually phase
down as income increased. Net changes in number of qualifying children can occur, for example, when a
single parent has two children in 2020 (the year of the information used to estimate the advanced credit),
but, because one of their children now lives with the other parent or another relative, one child in 2021.
Below is an illustrative example of how much would need to be paid back if an unmarried taxpayer
received an advance payment based on a projection that they would have two young children in 2021 (and
so were estimated to be eligible for $7,200 of which $3,600 would be advanced), but in actuality, they had
one or none.
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A more detailed overview of determining the payback amount can be found in the figure below.
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Author Information
Margot L. Crandall-Hollick
Acting Section Research Manager
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
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