What Is the Child Tax Credit (CTC)?
What is the Child Tax Credit (CTC)?
The Child Tax Credit (CTC) has become an increasingly important tax credit in recent years. The CTC is a federal program that provides a credit or a cash supplement to low and moderate-income households who qualify. For those who are eligible, the CTC will do one of two things: It will either lower your taxes or, should you not owe any taxes or owe less than the credit amount, you may be able to get cash back from the government in the form of a tax refund.
The CTC was created by the U.S. Congress and is supported by federal taxpayer dollars. The program is administered through the Internal Revenue Service (IRS) of the federal government.
Why was the CTC created?
As part of the Taxpayer Relief Act of 1997, the U.S. Congress created the Child Tax Credit in order to help lower the tax burden for families who are raising children. This legislation initially set the claim amount at $400 per child (for 1998) and $500 (for 1999 and 2000). At the start this credit was non-refundable for families with one or two children, meaning that if you did not owe any taxes the credit was of no use; or if you owed less in taxes than the credit amount, the difference would not be refunded to the tax filer. The credit was refundable from the beginning for families with three or more children.
The Economic Growth and Tax Relief Reconciliation Act, passed by Congress in 2001, provided numerous reductions in various forms of taxation to households in all income brackets. For low-income families, the lowest income tax bracket was lowered from 15% to 10% and substantial changes were made to the CTC. First, the amount of the credit was raised from $500 to $1000, to be phased in over a 9-year period. Second, the CTC was made to be partially refundable for families of all sizes who meet the income guidelines, which allows it to be of much greater value to these families. This change to the CTC has given it some of the characteristics of an anti-poverty and work incentive program, similar in some respects to the Earned Income Credit.
In May 2003, Congress increased the CTC for the 2003 and 2004 tax years from $600 to $1000 in order to help stimulate the then sluggish U.S. economy. In September 2004, Congress set the CTC at $1,000 per qualifying child for the 2005 tax year and beyond. In 2009, the earned income limit needed to claim the additional child tax credit was lowered to $8,500, making it easier to claim this credit.
Congress designed the CTC with an eye towards making it complementary to the Earned Income Credit and other programs. The CTC “phases-in” to be of maximum value to families at an income level where other programs such as food stamps begin to phase out. Also, the CTC can be claimed by a broader group of taxpayers than can the EIC. Families in the middle-income brackets who are not eligible for the EIC because their income is too high can still claim the CTC.
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