Child tax credit


A child tax credit (CTC) is a tax credit for parents with dependent children given by various countries. The credit is often linked to the number of dependent children a taxpayer has and sometimes the taxpayer's income level. For example, in the United States, only families making less than $400,000 per year may claim the full CTC. Similarly, in the United Kingdom, the tax credit is only available for families making less than £42,000 per year.

Germany


Germany has a programme called the "Kinderfreibetrag" [de] which functions as a tax credit. The child allowance is an allowance in German tax law, which a certain amount of money is tax-free in the taxation of parents. In the income tax fee paid, child benefit and tax savings through the child tax credit are compared against each other, and the parents pay whichever results in the lesser amount of tax.

United Kingdom


In the United Kingdom, a family with children and an income below about £32,200 could claim child tax credit on top of child benefit. The tax credit is "non-wastable" it is paid whether or not the family has a net tax liability and is paid in or out of work. Higher rates are paid for disabled children. It is integrated with the working tax credit, which also provides support for childcare costs.

All taxable income is tested for the credit, so a couple who both work and have children, will have both salaries taken into account. Tax Credits may be capped which it is claimed could affect the poorest families disproportionately. On Monday 26 October 2015, the House of Lords voted for Labour Party proposals for financial redress to those affected by reduced entitlements.[1]

Since 2018 Child tax credit has been replaced by Universal Credit for most people.

United States


There are several different tax credits an American taxpayer can claim. (Tax credits work differently than tax deductions.) One of the most common is the child tax credit (CTC), provided by 26 U.S.C. Sec. 24. The CTC is believed to have lifted about 3 million children out of poverty in 2016.[2]

Changes under the Tax Cuts and Jobs Act of 2017 (TCJA)

The Tax Cuts and Jobs Act of 2017 (TCJA), with efforts led by Sen. Marco Rubio (R-FL) and Ivanka Trump, made three major changes to the CTC: It (1) doubled the amount per qualifying child, rising from $1,000 to $2,000; (2) made up to $1,400 of the credit refundable; and (3) increased income thresholds to make the CTC available to more families.[3]

The child tax credit is available to taxpayers who have a "qualifying child." A person is a "qualifying child" if he or she has not attained the age of 17 by the end of the taxable year and meets the requirements of 26 U.S.C. Sec. 152(c). In general, a qualifying child is any individual for whom the taxpayer can claim a dependency exemption and who is the taxpayer's son or daughter (or descendant of either), stepson or stepdaughter (or descendant of either), or eligible foster child. For unmarried couples or married couples filing separately, a qualifying child will be treated as such for the purpose of the CTC for the taxpayer who is the child's parent, or if not a parent, the taxpayer with the highest adjusted gross income (AGI) for the taxable year in accordance with 26 U.S.C. Sec. 152(c)(4)(A).

Since 2018, the CTC is $2,000 per qualifying child. When first introduced in 1998, the per-child amount was originally capped at $400, and then at $500 in 1999, by the Taxpayer Relief Act of 1997. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) would have gradually increased the cap from $600 in 2001 to $1,000 in 2010, before reverting to $500.[4] However, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) increased the amount to $1,000 for 2003 and 2004. The Working Families Tax Relief Act of 2004 extended this amount through 2010.[4] The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended this $1,000 cap through the end of 2012.[5] The American Taxpayer Relief Act of 2012 made the $1,000 cap permanent.[6]

The CTC is refundable for those who meet certain income requirements and whose credit values exceed their tax liabilities. When a taxpayer credit value exceeds his or her tax liability, the taxpayer is eligible for the additional child tax credit (ACTC), which is calculated as 15% of the taxpayer's AGI in excess of $2,500, with the refund value capped at $1,400.

Prior to 2018, the full CTC was only available to single parents making less than $75,000 and families making less than $110,000 per year. The TCJA dramatically increased these income thresholds to $200,000 for single parents and $400,000 for married couples filing jointly. Above these limits, the CTC is phased out at the rate of $50 for each additional $1,000 (or portion of $1,000) earned.[7]

Expansion Proposals: American Family Act of 2019

In recent years, some lawmakers have pushed for expansions of the child tax credit, one proposal being the American Family Act of 2019.[8] According to Smith and Viard of the American Enterprise Institute, this act would increase the child tax credit's refundable portion to $3,600 per child under age six and to $3,000 per child age six to 16.[9] The Tax Policy Center estimated that this expansion of the child tax credit would decrease tax revenues by approximately $100 billion annually.[10]

Other Dependent Credits

The Tax Cuts and Jobs Act of 2017 also created an additional dependent credit, allowing families to claim an additional $500 for aging parent and older child requiring special care.[3]

The child and dependent care credit allows eligible taxpayers to deduct $3,000 per child for certain childcare services, capped at a total of $6,000 annually per taxpayer.[11]

See also


Notes


  1. "Tax credits: No return to 'uncontrolled' spending says Osborne". BBC News. 27 October 2015. Retrieved 3 September 2016.
  2. M.S.R. (16 October 2017). "Why Ivanka Trump wants to extend the child tax credit". The Economist.
  3. CFP, Matthew Frankel (9 January 2018). "The 2018 Child Tax Credit Changes: What You Need to Know -". The Motley Fool. Retrieved 21 March 2019.
  4. "NYSSCPA | The New York State Society of CPAs". www.nysscpa.org. Archived from the original on 6 May 2013. Retrieved 3 September 2016.
  5. "TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION, AND JOB CREATION ACT OF 2010". gpo.gov. Retrieved 2 September 2016.
  6. Nunns, James R.; Rohaly, Jeffrey (8 January 2013). "Tax Provisions in the American Taxpayer Relief Act of 2012 (ATRA)". Tax Policy Center. Retrieved 3 September 2016.
  7. "Child Tax Credit" (PDF). irs.gov. Internal Revenue Service. 1 January 2015. Retrieved 2 September 2016.
  8. Bennet, Michael F. (6 March 2019). "S.690 - 116th Congress (2019-2020): American Family Act of 2019". www.congress.gov. Retrieved 5 May 2020.
  9. "The child tax credit: Onward and upward?". American Enterprise Institute - AEI. 16 March 2020. Retrieved 5 May 2020.
  10. "T19-0006 - Expand the Child Tax Credit (CTC); Baseline: Current Law; Impact on Tax Revenue ($ billions), 2019-28". Tax Policy Center. 1 April 2019. Retrieved 5 May 2020.
  11. "Child and Dependent Care Tax Credit for 2018, 2019". American Tax Service. 11 December 2018. Retrieved 21 March 2019.

References