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1 1 (November 19, 2024)

handle is hein.crs/goverhz0001 and id is 1 raw text is: Congressional Research Service Informing th~ IegislThve debate since 1914 November 19, 2024 Selected Issues in Tax Policy: The Child Tax Credit Tax reform proposals in the 119th Congress may include reforms to the child tax credit, which increases the after-tax incomes of some households with children. The child tax credit was substantively modified by P.L. 115-97 (often referred to as the Tax Cuts and Jobs Act, TCJA), and those changes are scheduled to expire after the 2025 tax year. This In Focus summarizes the child tax credit and briefly examines some key policy issues that may be relevant to proposals for its reform. Sumr ary and Legislatve Background 201 7 Parameters Prior to enactment of the TCJA, the child tax credit let taxpayers reduce their tax liabilities by up to $1,000 per child. The credit was refundable, meaning those with no income tax liability could receive the credit as a refund. The credit phased in with earned income: it was worth 15% of a taxpayer's earned income above $3,000, up to the maximum credit amount. Taxpayers with no earned income could not claim the credit, and those with low earned income could claim a partial credit. The credit's value also phased out with a taxpayer's modified adjusted gross income (MAGI). Taxpayers had to reduce the value of their credit by 5% of their MAGI above certain thresholds: $110,000 if the taxpayer was married filing jointly and $75,000 otherwise. (For example, a single taxpayer earning $85,000 would have the credit reduced by 5% of $10,000, or $500.) Filers had to include a taxpayer identification number (TIN) for themselves and the child for whom they claimed the credit. Qualifying TINs could include a work-authorized Social Security Number (SSN) or an Immigrant Taxpayer Identification Number (ITIN) issued by the IRS. Qualifying children generally must have been under 18 and have lived with the taxpayer for at least half the year. Current Polcy (TCJA) Parameters and Temporary 2021 Changes The TCJA temporarily changed the credit's parameters through the end of 2025. The law raised the maximum value of the child tax credit to $2,000 per child. It also limited the amount that a taxpayer could receive as a tax refund if a taxpayer lacked income tax liability against which to apply the credit. That amount was initially set at $1,400 and indexed to inflation (and equal to $1,700 in 2024 and 2025). The refundable portion of the credit is known as the additional child tax credit, or ACTC. The TCJA also lowered the earned income threshold at which the credit began phasing in from $3,000 to $2,500. The threshold at which the credit began phasing out rose to $400,000 for those married filing jointly and $200,000 for others. The law also required that filers provide a work- authorized SSN (i.e., not an ITIN) for the child for whom the credit is claimed. These changes may offset another provision of the TCJA, the temporary elimination of personal exemptions for dependents. Because not all dependents qualify for the child tax credit, the TCJA also created a $500 nonrefundable credit for other dependents. Congress further expanded the child tax credit for tax year 2021. The credit was made fully refundable with no phase- in; families with no income could receive the full credit. The maximum credit was raised to $3,000 per child over the age of 5 and $3,600 for each child age 5 and younger. The additional credit, above TCJA levels, phased out for those with incomes above certain thresholds: $150,000 for married joint filers, $112,500 for head of household filers, and $75,000 for single filers. Additionally, policymakers made half the credit advanceable, meaning taxpayers received it in monthly installments rather than solely upon filing their tax returns. The Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) estimated that making these changes permanent would have raised deficits by roughly $1.6 trillion from FY2022 to FY2031, excluding the cost of debt financing. Parameters Start ng in 2026 Congress scheduled the TCJA's changes to the child tax credit to expire at the end of 2025. In 2026, the credit will revert to its 2017 parameters absent congressional action. The maximum credit will be $1,000 per child, the preexisting phase-in and phaseout thresholds will return, and taxpayers whose children lack work-authorized SSNs will once again qualify. Taxpayers will no longer have the option of claiming the nonrefundable credit for other dependents, but will be able to claim personal exemptions for their dependents, including children. The JCT estimates that extending the TCJA's changes to the child tax credit and credit for other dependents would increase deficits by $748 billion through 2035, excluding the cost of debt financing. Extending the work-authorized SSN requirement would offset $12 billion (2%) of that cost. Pol cy Cons derat ons and Proposals for Re orm Po cy ssues and Cons derations The child tax credit presents a number of issues lawmakers could consider when deciding whether to let the expiration occur in 2026, extend the TCJA's policies, or alter them. Because the child tax credit phases in with earned income, it potentially affects whether filers earn income. The credit

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