The Future of the Child Tax Credit

With many provisions of the 2017 Tax Cuts and Jobs Act (TCJA, P.L. 115-97) set to expire at year end and a push for fiscal responsibility in any tax reform, lawmakers are making their priorities known. But questions remain about where lawmakers stand on the future of the Child Tax Credit (CTC) — set to be halved in 2026 under current law.

Background.

Under Code Sec. 24, taxpayers can claim a credit for each “qualifying child,” with phaseouts for taxpayers at certain income levels. Under the TCJA, for the 2018-2025 tax years (other than 2021), the CTC is $2,000 per qualifying child. After 2025, it is set to drop back down to $1,000 per qualifying child.

A “qualifying child” is one who is under age 17 at the end of the tax year and for whom a taxpayer is allowed a dependency deduction under Code Sec. 151. The TCJA added a requirement that a Social Security number be provided for each qualifying child for whom the CTC is claimed — that requirement expires at year end.

The CTC is also partially refundable for certain taxpayers. For tax years 2018-2025, the refundable credit per qualifying child can’t exceed $1,400, as adjusted for inflation. After 2025, the $1,400 limit and inflation adjustment won’t apply.

In addition, refundability is currently limited to 15% of a taxpayer’s earned income over $2,500, with an alternate calculation for families with three or more children. In 2026, the earned income threshold will be $3,000 regardless of the number of children for which the CTC is claimed.

For 2021, the CTC was temporarily increased to $3,600 per child under six and $3,000 per child aged six to 17. It also was provided via monthly payments and made fully refundable.

Last year’s tax reform efforts.

A bipartisan effort by then-Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Chair Jason Smith (R-MO), the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), would have temporarily enhanced the CTC — but it didn’t offer a permanent change.

That bill, which ultimately stalled last year in the Senate, would have increased refundability for tax years 2023-2025 and adjusted the credit for inflation starting in 2024.

But the most controversial provision was allowing taxpayers to “look back” to the prior tax year in 2024 and 2025 when calculating the credit if they earned less income in that previous year.

Senator Mike Crapo (R-ID), who now chairs the Senate Finance Committee, took issue with the 2024 bill’s CTC provisions, saying they “undermine the work requirement and represent a significant shift … to transform the CTC from primarily working family tax relief into a government subsidy.”

In particular, Crapo called out the look-back provision. “Allowing individuals to receive a refundable credit when they have zero annual earnings — as the prior year’s earnings provision allows — is a departure from longstanding policy tying the CTC to work,” he said.

However, even if the bill had been enacted into law, the CTC would still revert to its pre-TCJA format in 2026.

Future options.

With changes set to go into effect next year even if lawmakers take no action, where is the CTC headed?

According to George Callas, who leads the Public Finance team at Arnold Ventures, “the ceiling is probably somewhere around last year’s bill, and the floor is probably somewhere around the TCJA-expired version of the credit.” According to Callas, “that’s actually not a huge delta.”

However, an increase in the CTC is not guaranteed, explained Callas at a January 31 Bipartisan Policy Center briefing. But “it would be politically dicey to cut it from where it has been for the past eight years.”

Arnold Ventures released a report earlier this week with its tax reform picks. Among the recommendations was eliminating head of household filing status and using the savings to improve the CTC. While the report does not lay out specific improvements, it notes options include “the provisions of the House-passed Tax Relief for American Families and Workers Act.”

According to the Tax Policy Center’s Elaine Maag, “every time we’ve expanded the Child Tax Credit in the past, those expansions have stuck.” Maag, speaking at a January 30 Brookings panel, said it “was a little bit of being caught … flat-footed that it became such a debate.”

But to Maag, the question becomes, “How can we convince people that their government can work for them in more than just times of great chaos?” There’s no reason the government can’t provide assistance during “normal times,” she said, but “we need to be much more clear about how a government can provide help and how the government can actually do it better than other sectors.”

American Enterprise Institute’s (AEI) Angela Rachidi said she expects “there will be some bipartisan compromise on the Child Tax Credit.” Rachidi, speaking at a January 22 webinar hosted by the University of Wisconsin-Madison’s Institute for Research on Poverty, doesn’t think the end result will be a 2021-level, fully refundable CTC. However, she said she’s seen “interest from both sides of the aisle” to “maybe make it bigger.”

The question for Rachidi is, “How are we going to pay for it? … Is it going to be from cuts to other parts of the safety net?” For her, “that’s where some of the bipartisan compromise issues sort of fall apart.”

There’s not yet “a bipartisan consensus around expanding the credit,” said AEI’s Michael Strain, during the Brookings panel. And “certainly” there’s not “a bipartisan consensus on full refundability,” he added.

But according to Strain, “there’s some pretty prominent Republicans who have supported full refundability, including Vice President Vance who … kind of nodded to it during the campaign.”

This year’s legislative proposals.

A recent House menu of tax options contains just one proposal specifically on the CTC — making permanent the requirement for taxpayers to provide a Social Security number for each child for which the CTC is claimed. That requirement went into effect for 2018-2025 under the TCJA, but is set to expire next year. Extending it comes with $27.7 billion in savings over 10 years, according to the menu.

Other related proposals on the menu include eliminating head of household status and restructuring the Earned Income Tax Credit into a “worker credit” and “child credit.”

But as we await the unveiling of a broad tax reform bill, there’s been no shortage of single-issue bills to revise the CTC — despite Congress having convened just a month ago. These varied proposals show that there isn’t yet agreement even within the Republican party — which is expected to drive the 2025 tax reform efforts — on the size and refundability of the deduction.

In a broad proposal to extend Tax Cuts and Jobs Act expiring provisions, the TCJA Permanency Act (H.R. 137), Representative Vern Buchanan (R-FL) is calling for a $2,000 annual credit per qualifying child. Buchanan’s proposal requires that the child’s Social Security be included on the tax return and would provide for partial refundability.

Buchanan told Checkpoint that he and his Ways and Means colleagues “are still actively discussing final numbers.” He hopes to “lock in” lower tax rates for families with his bill — cautioning that “if we allow these Trump tax cuts to expire at the end of this year, the CTC will immediately be cut in half.”

But Representative Blake Moore (R-UT) is calling for more than just an extension of the CTC. His proposal (H.R. 353) would provide for a generous expansion — $4,200 for families with children under six, $3,000 for families with children age six to 17, and $2,800 for pregnant mothers. Families would need to earn at least $20,000 to receive the full credit (or $10,000 for pregnant mothers) under the bill. Moore would allow families to claim the credit for up to six children each year and require that both a parent and claimed child have a Social Security number. (More here.)

Multiple Republican-backed bills zero in on the expiring requirement that children for which the CTC is claimed have a Social Security number. Those include Representative Jefferson Van Drew’s (R-NJ) H.R. 547, Representative Clay Higgins’ (R-LA) H.R. 778, and Senator Cindy Hyde-Smith’s (R-MS) S. 268.

And one Democrat-led bill would reinstate a feature of the 2021 version of the CTC —providing monthly payments to families. Under Representative Emilia Sykes’ (D-OH) H.R. 463, payments would be $350 per month for children under age six, and $300 per month for children over six. Sykes is also proposing an expanded Earned Income Tax Credit.

With so many options on the table, it’s unclear what the CTC will look like in 2026 and when we will know more. “Some people think that tax will end up having to be a bipartisan deal,” said Callas, “in early 2026 after the tax cuts have expired.” There’s the possibility, he explained, that “it’s going to have to be done outside of reconciliation, because they’re going to need Democratic votes.”

For more on the Child Tax Credit, see Checkpoint’s Federal Tax Coordinator ¶ A-4050 et seq.