EITC and Child Tax Credit
Two tax credit programs are administered by the Internal Revenue Service (IRS) to distribute money to low-income Americans. The tax credits include a “refundable” portion, which is paid to individuals and families that owe no income tax for the year. Therefore, this portion acts as a “negative income tax” and serves as a welfare program to support low-income working families with children. The two programs are the Earned Income Tax Credit (EITC) [i] and the Child Tax Credit (CTC) [ii].
CTC Expansion
The CTC was expanded dramatically in 2021 in the Coronavirus Relief Bill. It represents one of the largest single-year expansions in the history of welfare. The program was dramatically expanded to $3,000 per child per family, as further discussed below. In 2022, the program cost was $131 billion, making it the third largest welfare program behind Medicare and SNAP (food stamps). The expansion expired by 2023, and the program’s expenses dropped to $28.8 billion.
The expansion of the CTC represents a movement toward Universal Basic Income – see more below.
EITC Summary
EITC to an individual or family is based on a complicated calculation that includes the family size and the amount of qualifying earned income. The reason the individual or family can have earned income but pay no income tax is that their earnings are less than allowable deductions, such as the standard deduction for married filing jointly of $25,900 and single head of household of $19,400 (for the tax year 2022) [iv].
In 2023, annual EITC payments are limited to $600 for individuals without children and $3,995, $6,604, and $7,430 for families of one, two, and three or more children. Therefore, the program emphasizes families with children. Maximum payments occur to families with annual earnings of between $15,000 and $25,000, depending on the number of children, and are phased out entirely to families with earnings of $53,120 to $63,698 per year, depending on family size and filing status. Individuals or families must have less than $11,000 in investment income (income from interest and dividends) to qualify for the program.
In 2022 it is estimated that 31 million workers and families received EITC [v]. EITC and CTC lifted about 5.6 million people out of poverty in 2018 – meaning the credit raised the income level of the people above the poverty threshold. This compares to 38.1 million people in poverty overall in 2018 (See U.S. Poverty Statistics). The IRS believes the program is underutilized by about 20%. This would represent up to 1.3 million families.
CTC Summary
The CTC totals up to $2,000 per qualifying child under 17 years old. The credit phases out for married couples with an adjusted gross income of $400,000 and single parents over $200,000. If the credit exceeds taxes owed, the taxpayer can receive a refundable portion called the Additional Child Tax Credit (ACTC). The refundable portion is limited to $1,500 per qualified child. The qualified child must be a dependant of the taxpayer, have a social security number, and meet relationship and residency tests.
One-time expansion for the Covid Pandemic
For the tax year of 2021, the CTC was expanded in the Coronavirus Relief Bill. The Relief Bill Included an increase for a one-year period to the Child Tax Credit from $2,000 per child per year to $3,000 per child over six years old and $3,600 for children under six years old. The age limit for children was also raised to include seventeen-year-old children. Income qualification and phase-out of the credit on the first $2,000 per child remained unchanged. The increase to $3,000 or $3,600 per child was phased out by $50 per $1,000 of household Adjusted Gross Income over $75,000, or for married couples filing jointly $150,000.
The entire credit was made refundable, whereas, in prior years, the refundable portion was limited to $1,400 per child. Refundable means the credit is paid in cash regardless of whether the household pays income tax or not. The Relief Bill also stipulated the payment of the credit be throughout the year as opposed to obtaining the cash upon the filing of a tax return, which is the case for 2020 and prior years. The credit, therefore, acts like a welfare program or universal basic income program. Most tax credits just reduce income taxes payable; the refundable portion acts as a negative income tax, paying benefits regardless of taxes owed.
CTC Experiment in Universal Basic Income
The expansion of the CTC in the Coronavirus Relief Bill created a Universal Basic Income program for a broad swath of the American public. The expansion of the credit to $3,600 for children under six years of age and $3,000 for children aged six to seventeen represents a cash payment to families to be used however they desire. The credit represents a policy and social experiment by the federal government – never in the history of welfare has a cash benefit been paid out to such a large swath of the public. There are no rules on what the cash can be used for, although it is hoped the parents or guardians use the money wisely to help the family and especially their children. The experiment was set up for just one year – 2021.
The Relief Bill was passed in a partisan manner – virtually all Democrats voted for it, and no Republicans supported it. The Child Tax Credit expansion had some verbal Republican support, but Republicans felt the entire Relief Bill was just too large and went beyond Coronavirus relief. Many Republicans believe a simple system of paying cash to welfare recipients, with no strings attached, is a better welfare design but should replace other programs, not be in addition to them. The Democrats were enthusiastic about the Relief Bill, in part due to its broad scope and increase in the welfare programs of the federal government.
For the credit to become permanent, it would require additional legislation passed by Congress and signed by the President. This has not happened to date, and the one-time credit expired for the 2022 tax year.
Total Welfare System
Refundable Income Taxes are one of thirteen welfare programs. See how it fits in the entire system on the Welfare Programs Page.
Improper EITC Payments and Fraud
The EITC program has the highest Improper Payments record in the welfare system. The Office of Management and Budget estimates a 31.6% Improper Payment rate related to EITC, which totals $36.9 billion. See more information on the Welfare Fraud Page.
EITC History
EITC was created in 1975 and was initially very modest [vi]. Tax legislation expanded it in 1978, 1984, 1986, 1990, 1993, 2001, and 2009. The expansion over the years has included the amount of the credit per child and the expansion of coverage of more children per family.
CTC History
The CTC was created in 1997 by the Taxpayer Relief Act of 1997 [vii]. The Economic Growth and Tax Relief Reconciliation Act of 2001 doubled the credit from $500 to $1,000 and made the refundable portion of the credit available to more families. The American Recovery and Reinvestment Tax Act of 2009 (Stimulus Bill) lowered the minimum threshold for phase-in of the credit to $3,000, down from $10,000. These provisions were extended through December 31, 2012, in The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The American Taxpayer Relief Act, which passed on January 1, 2013, permanently extended the credit to $1,000.
The Tax Cuts and Jobs Act of 2017 expanded the credit to $2,000 per qualifying child and increased the refundable portion to $1,400 per qualified child (increasing annually with inflation). The Act also raised the qualifying income limit to $200,000 for individuals and $400,000 for joint filers.
The Coronavirus Relief Bill expanded the program for the tax year 2021, as shown above.
Refundable Tax Credit Expenditures Over The Years
The chart to the right shows expenditures for EITC and CTC from 2019 to 2023 [iii].
The graph below shows federal expenditures for the EITC and the CTC per year, adjusted for the impacts of inflation (stated in 2022 dollars) [viii]. The dramatic cost increase in 2020 – 2022 is due to the expansion of the CTC program discussed above.
[i] For a description of the EITC program and related tax data, see EITC and other refundable credits. Internal Revenue Service. EITC Central. [Internet]. Retrieved April 17, 2023. Available here.
[ii] For a description of the Child Tax Credit, EITC, and other refundable credits. Internal Revenue Service. EITC Central. What you need to know about CTC, ACTC, and ODC. [Internet]. Retrieved April 17, 2023. Available here.
[iii] USGovernmentSpending.com [Internet]. Total for Payments Where Earned Income Credit Exceeds Liabilities For Tax and Total for Payments Where Child Tax Credit Exceeds Liability For Tax; the fiscal year 2019 – 2023. [Internet]. Retrieved March 15, 2024. Available here.
[iv] Internal Revenue Service (IRS) Publication 501 – For Use in Preparing 2022 Returns. [Internet]. Retrieved April 17, 2023. Available here.
[v] Internal Revenue Service (IRS). EITC Fast Facts. [Internet]. Retrieved April 17, 2023. Available here.
[vi] Congressional Research Service. The Earned Income Tax Credit (EITC): A Brief Legislative History. Margot L. Crandall-Hollick Specialist in Public Finance. March 20, 2018. Available here.
[vii] Congressional Research Service. The Child Tax Credit: How it Works and Who Receives It. Margot L. Crandall-Hollick. November 17, 2020. Introduction. Available here.
[viii] Data from USGovernmentSpending.com [Internet]; see footnote [iii]. See methodology of inflation adjustment on the web page, Poverty and Spending Over the Years.