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A Bipartisan Plan to Permanently Reform the Child Tax Credit

You can view our tax report here: How to Sensibly and Permanently Expand the Child Tax Credit and Earned Income Tax Credit.

 

The Child Tax Credit (CTC) assists families with the cost of raising children and helps kids grow up in homes with adequate resources for healthy development. With a temporary CTC expansion expiring at the end of this year, however, the most vulnerable households will once again be without critical financial support. Congress should therefore enact permanent bipartisan reforms to the CTC that produce lasting benefits for American families.

The Bipartisan Policy Center (BPC) has developed a plan to be implemented in 2022 that creates a durable solution to a chronic problem, strengthens the safety net while rewarding work, and sets the credit on the secure political foundation of bipartisanship.

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What is the CTC, and why does it need reform?

The CTC can help parents pay for critical needs like child care, school tuition, books, healthy food, medical care, and housing. These necessities give children more stable, economically secure childhoods, thereby promoting healthy development that benefits children in the long run.

While the CTC has lifted millions out of poverty, it has generally given the most help to households that are middle class or higher (except those with the very highest incomes, for which the credit phases out). Historically, parents with little or no earnings have been ineligible for the full credit—and many were not eligible for any credit at all. While the Tax Cuts and Jobs Act of 2017 (TCJA) expanded the credit for most families through 2025, nearly 7 million children in low-income families remained ineligible to claim it. The American Rescue Plan of 2021 (ARP) further expanded the CTC—but for one year only—to help the most vulnerable families, who had long been excluded from the credit’s assistance. The changes, however, also raise serious questions about fully severing the credit’s connection to work, the expansion’s substantial cost, and the political durability of an emergency expansion passed along party lines.

BPC’s Recommendations

  • Increase the maximum credit amount per child to $2,200, make the first $1,200 fully available regardless of earnings, and phase in the remainder starting at the first dollar of earnings.
  • Eliminate the $1,400 per-child cap on CTC refunds.
  • For children under age 6, increase the maximum credit amount per child to $2,800 and make the first $1,800 fully available regardless of earnings.
  • Pay the fully available portion of the CTC periodically throughout the year.
  • Raise the maximum age for eligible children to 17.
  • Lower the income threshold for the CTC phase-out.

In 2031—when paired with our recommendations to improve the Earned Income Tax Credit (EITC)—BPC’s proposal will:

  • Reduce the number of Americans in poverty by 4.1 million, reduce the number of children in poverty by 2.3 million, and reduce the number of children in deep poverty by more than 800,000.
  • Increase labor supply by 0.3% among the poorest 20% of households.
  • Improve the cost-effectiveness of these poverty-reducing credits, as measured by the number of children and adults lifted from poverty per federal dollar spent.

BPC’s proposal produces a more optimal combination of poverty reduction, work incentives, and overall cost than other proposals, such as a permanent extension of the provisions of the TCJA or ARP that temporarily modified the CTC or EITC. Over the next 10 years, TCJA extension would cost $495 billion, ARP extension would cost $1.7 trillion, and BPC’s proposal would cost $1 trillion.

CTC Schedule for a Single Parent with One Qualifying Child Under BPC Proposal and Current Law, 2022–2025

*The CTC phases in with earnings but phases out with modified adjusted gross income. 

Note: Graph assumes single parent takes the head-of-household deduction and claims no other tax benefits before applying the CTC. 

Permanently increase the maximum credit amount to $2,200 per child. Make the first $1,200 of the CTC fully available regardless of earnings, and phase in the remaining $1,000 starting at the first dollar of earnings

When the maximum CTC decreases from $3,600 to $2,000 per child at the end of this year—and to $1,000 per child when the TCJA provisions expire at the end of 2025—Americans will need additional financial support to help cover the cost of raising children. That support should also continue to reward work.

BPC recommends increasing the maximum credit to $2,200 for children between the ages of 6 and 17 to give families enduring assistance—providing the first $1,200 per child regardless of earnings to better support children in low-income families, and phasing in the remaining $1,000 per child beginning at the first dollar of earnings to continue to reward parents’ work.

Eliminate the $1,400 cap per child on CTC refunds

Neither the safety net nor work incentives are strengthened by a cap on refunds that creates an arbitrary discontinuity in the CTC’s phase-in. BPC recommends eliminating the $1,400 per-child limit on CTC refunds and allowing working parents to access the full credit they have earned regardless of tax liability.

Increase the CTC for young children

Families face significant costs during the first years of a child’s life, but parents of young children have fewer resources, as they are earlier in their careers and have had less time to build savings.

We propose increasing the maximum value of the CTC to $2,800 per child ages 5 or younger, with the first $1,800 fully available regardless of earnings and the next $1,000 phasing in with earnings. This expansion will help parents make critical investments in their kid’s early years and afford to stay home with them longer, building a stronger parent-child relationship and supporting a child’s healthy development.

Pay the fully available $1,200 or $1,800 portion of the CTC monthly

Because our proposal creates a portion of the credit that does not depend on a family’s earnings (except for high-income families in the credit’s phase-out range), it presents an opportunity to help families throughout the year that is administratively feasible for the IRS and does not put low- and moderate-income recipients at risk of owing money back at year’s end.

We recommend that the fully available portion of the credit—the first $1,800 for children ages 5 or younger and the first $1,200 for older children—be paid in optional monthly installments throughout the year. The $1,000 phased-in portion of the credit will be delivered during tax season, helping eligible families either reduce their tax liability at the end of the tax year or take advantage of the credit as a forced savings mechanism.

Raise the maximum age of eligible children to 17

A dependent who is 17 years old costs no less to support than one who is 16; the former is still in important developmental years, when family resources can catalyze long-term benefits. BPC’s proposal therefore extends CTC support to additional families with older children.

Lower the CTC phase-out income threshold

Better targeting federal assistance to those who need help most is a critical component of BPC’s proposal. We recommend beginning the credit’s phase out at incomes of $150,000 for single filers and $200,000 for married couples—instead of $200,000 for single filers and $400,000 for joint-filers under current law—to more efficiently target low- and middle-income families.

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