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Current Law

The child tax credit was enacted in 1997 to reduce the tax burden of filers with children. It was expanded in the 2001 tax relief (EGTRRA) for ten years, and extended for an additional two years by the 2010 tax act (TRUIRJCA). The credit is currently worth $1,000 per child under the age of 17, subject to limits. The credit is reduced by $50 for every $1,000 that the filer’s AGI exceeds a certain threshold ($75,000 for heads of household and $110,000 for joint filers).

The credit has a “refundable” aspect as well, known as the additional child tax credit. The additional credit pays filers beyond their tax liabilities for the greater of 1) 15% of earned income over $3,000, or 2) the amount of payroll taxes not offset by the Earned Income Tax Credit (EITC) for households with three or more children.

Scheduled Changes

In 2013, the per-child value of the child tax credit will fall by half, to $500. The “additional,” refundable portion of the credit will be limited to strike the 15% provision stated above. Additionally, the child tax credit will only be available for Schedule I filers — AMT filers will not be able to claim the credit.

ATRF Analysis

There is an important distinction to be made between the child tax credit and its refundable provision, the additional child tax credit. The child tax credit is genuine tax relief — in 2009, it was claimed by 23.6 million filers to offset $28.4 billion in income taxes, for an average credit value of roughly $1,200. The expiration of this relief, most of which is claimed by lower- and middle-income taxpayers, should be fought.

The additional child tax credit, in most cases, cuts a check to its recipients, and can rightly be viewed as a spending program. The IRS dubs payments made through the additional credit “refunds,” but that is an abuse of the word’s ordinary usage, because the payments it refers to are made to filers with negative tax liabilities — they have paid nothing into the system which can be refunded. The additional child tax credit rivals its tax-relieving counterpart in scale: in 2009, it awarded 21.3 million recipients an average handout of roughly $1,270, for a total program cost of $27.2 billion. The additional credit is a spending program (indeed, the Treasury Department and other budget authorities score it for its outlay effects), and cannot be viewed as tax relief. Its broad 15% provision should be allowed to expire, to reduce spending.

One final note must be made concerning AMT filers, who will not be able to claim the child tax credit against their AMT liability. This seemingly minor change will affect countless taxpayers (most of them middle-income), and, because of the AMT’s perverse eligibility rules, will affect more taxpayers each year. It will potentially raise each AMT filer’s tax bill by thousands of dollars.

10 Year Revenue Effect

Department of the Treasury: $409.7 billion (of that amount, $213.3 billion are outlays, or “refunds”)

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