Breaking Down the Child Tax Credit: Refundability and Earnings Requirements

More than 46 million taxpayers claim the Child Tax Credit (CTC) each year, and recent temporary expansions have sparked debate in Congress about the credit’s future.

Lawmakers have many decisions before them, including:

• What the per-child credit amount should be;
• How much of the credit should be available to parents who owe very little or nothing in federal income taxes; and
• Whether the full credit should go to parents with little or no earnings.

This blog concerns the latter two questions—among the most important for Congress to answer when reforming the CTC: the “refundability question” and the “earnings requirements question.”

The Refundability Question

Under current law, the CTC is $2,000 per child but only $1,600 per child is refundable. This means only $1,600 per child is available to parents who owe little to nothing in federal income taxes. Some lawmakers talk about making the CTC fully refundable, meaning the full credit would be available to taxpayers even if their federal income tax liability is less than the credit amount.

Example A: John and Jane are married joint filers with two dependent children under age 17. John and Jane earned $30,000 in 2023. They take the standard deduction on their tax return, valued at $27,700, meaning that only $2,300 of their income is subject to federal income taxes ($30,000-$27,700 = $2,300). That puts them in the lowest tax bracket (10%), meaning they owe $230 in federal income taxes ($2,300 * 10% = $230).

If the CTC were fully refundable, John and Jane would receive $4,000 (the maximum of $2,000 per child, multiplied by two children). Under current law, however, only $1,600 per child is available as a refundable amount, so John and Jane receive $3,430 ($1,600 per child, multiplied by two children, for the refundable amount, plus $230 that offsets their income tax liability).

Example A: John and Jane
Filing Status	Married Filing Jointly
Children	2
2023 Earnings	$30,000
2023 Standard Deduction	$27,700
2023 Taxable Income	$2,300
Tax Bracket	10%
2023 Tax Liability	$230
2023 CTC Non-Refundable Amount	$230
2023 CTC Refundable Amount	$3,200 ($1,600 per child)
CTC Amount	$3,430

The Earnings Requirements Question

Other lawmakers talk about ensuring the CTC continues to incentivize workforce participation, meaning there are earnings requirements (thresholds) to claim it. Lawmakers seeking to eliminate earnings requirements want to make the CTC available to taxpayers regardless of their earnings. This is different than refundability, which concerns income taxes.

Eligibility to claim the CTC is determined by and phases in with one’s earnings: Anyone earning less than $2,500 annually is currently ineligible to claim the credit. Starting at $2,500 in earnings, the credit phases in at a 15% rate, meaning for every $100 earned above $2,500, a taxpayer receives $15 in CTC. For example, a taxpayer with $3,500 in earnings would receive $150 in CTC ($3,500 – $2,500 = $1,000; $1,000 * 15% = $150). A taxpayer with multiple children must phase in the credit amount one child at a time.

Example B: Mark and Mary are married joint filers with one dependent child under age 17. Mark and Mary earned $10,000 in 2023. Because the CTC phases in at a 15% rate, and Mark and Mary earned $7,500 in income above the $2,500 threshold ($10,000-$2,500 = $7,500), Mark and Mary would receive $1,125 ($7,500 * 15% = $1,125).

Example B: Mark and Mary
Filing Status	Married Filing Jointly
Children	1
2023 Earnings	$10,000
2023 Standard Deduction	$27,700
2023 Taxable Income	$0
Tax Bracket	10%
2023 Tax Liability	$0
2023 CTC Non-Refundable Amount	$0
2023 CTC Refundable Amount	$1,125
CTC Amount	$1,125

The credit’s phase-in rate and threshold are respectively 15% and $2,500 regardless of whether a taxpayer is a single-parent or a two-parent household. If Mark were instead a single father and earned $10,000 in 2023, his CTC amount would be the same: $1,125. (For parents that file their taxes separately, only one parent can claim a given child for the CTC.)

Some stakeholders have called for lowering the CTC earnings threshold so that it applies at the first dollar of earnings. If the CTC phased in at the first dollar of earnings, John and Jane would receive $1,500 in CTC ($10,000 * 15% = $1,500) instead of $1,125.

Refundability vs. Earnings Requirements, Visualized

The following graph shows the difference between refundability and income requirements for the CTC by representing the amount of CTC that a two-parent household with two children would receive in 2023 based on their gross income for the year. It includes an illustrative example of how those CTC amounts would differ if the credit were fully refundable and phased in at $1 of earnings instead of $2,500. These two policy changes would make more of the credit available to low-income families but would retain work incentives in the design of the CTC.