The Child Tax Credit (CTC) has grown to be one of the major federal policies helping families afford the costs of raising children. Child poverty fell by nearly one-half, reaching its lowest level ever, after the American Rescue Plan Act of 2021 temporarily increased the credit to $3,000 per child ($3,600 for children under 6) and allowed low-income families to be fully eligible for the credit. Several subsequent bills have proposed to expand the CTC, including the Build Back Better Act in late 2021 and the bipartisan Tax Relief for American Families and Workers Act in 2024. After the 2025 changes from H.R.1 increased the credit amount by $200, the CTC currently stands as a partially refundable credit with a maximum credit of $2,200 per child.
This post explores how different types of families fare under CTC rules today, examining issues relating to eligibility, refundability, and child claiming rules. Though the focus here is on the CTC, similar issues arise in other family tax policies, including the Child Care and Dependent Tax Credit, the Earned Income Tax Credit, and filing status. The complexity of these rules illustrates the broader challenges of crafting tax policy and administration to fit with how families live their lives.
The Millers & The Wilsons: A Tale of Two Families
For families with low to moderate incomes, larger families mean smaller CTCs for each child
In a small community, the lives of two families unfold. David and Sarah Miller have two children. David earns $36,000 working at the local soybean processing plant and Sarah cares for their two young children. After $4,680 in deductions for their health insurance premiums and other employee benefits, and after the standard deduction, they do not owe federal income tax (though they still pay state taxes and Federal payroll taxes). If they made three times (or even seven times) as much income, they would receive the full $2,200 CTC for each of their two children. However, because they have insufficient tax liability, they only receive $1,700 per child, or 77 percent of the full $2,200 amount). That means they receive $1,000 less than the full value of the credit that a higher-income family would receive.
Just down the road live the Wilsons, a family of 7. Mark and Carol Wilson have five kids. Mark works two jobs, picking up extra shifts whenever possible, and Carol manages the house and homeschools the children. Every month is a delicate balance of scrimping and stretching to cover the basics—utilities, groceries, clothes, and school supplies. Even though the Millers also make $36,000 and have $4,680 in health insurance and other deductions, Mark and Carol are limited to a credit amount that is 15 percent of their earned income—a limit that does not adjust with the number of children they have. That means they only receive 40 percent of the full $2,200 CTC for each child because they have a larger family.
Estimates show that 30 percent of all children are ineligible for the full $2,200 CTC due to the policy tying benefit amounts to earned income and capping benefits based on tax liability.
Jessica & David: Committed Parenthood
The combination of rigid rules around work & who can claim a child can leave some parents out
Jessica’s 12-year-old son, Ryan is the center of her world. Jessica used to work long hours at the county hospital, her shifts often unpredictable and exhausting. After her hospital closed, faced with high costs of child care, increasing care needs of her aging parents, and the low prospects of finding work less than 2 hours away, Jessica decided to raise Ryan at home and not go back to work for the next few years.
Though Ryan’s father David and Jessica are no longer a couple and no longer live together, David’s commitment to Ryan is unwavering. David helps support Jessica and Ryan’s expenses, picks up Ryan from school every single day, coaches his baseball team, and helps with homework. Ryan also stays with his dad 25 percent of the time. David is far more than a financial contributor—he is a critical role model and consistent presence.
However, the combination of the current rules around earnings and who can claim Ryan on their taxes would mean this family would not receive the CTC. Jessica is not eligible for the CTC because she does not have earned income. Yet, the rules also deny David the CTC because he did not reside with Ryan for over half the year (see Note 1).
The Moore Family: A Path to Recovery & Reunification
Current rules require the IRS to inquire into the detailed circumstances of families & apply a set of rules that can be confusing & inflexible
Martha, a sixty-five-year-old grandmother, is the Moore family matriarch. She has taken on the role of primary caregiver to her eight-year-old grandson, Ben. Ben’s mother Katie has been in treatment for opioid substance use disorder, a crisis that has ravaged their family and community.
The financial strain on Martha, a retired school teacher, is immense. Her pension is stretched thin to cover Ben’s needs and she has even gone back to work part-time. Katie is doing well in recovery and is taking slow, deliberate steps toward restoring her health and rebuilding her life. She has moved back in with Martha and Ben and has started a new job while going to treatment.
Martha was claiming Ben on her return while Katie was not living with them. This year, Katie agrees that Martha should claim Ben again. However, the current rules prioritize parents over non-parent relatives like Martha in the same household and do not allow the family this choice. In this case, Katie and Martha both agree that Martha should claim Ben, but the current tiebreaker rules prevent Martha from claiming Ben because Martha’s adjusted gross income is lower than Katie’s. Moreover, Martha’s pension income is not considered earned income, limiting the refundable portion of the credit she could receive and therefore lowering the overall monetary value of the credit the family would receive.
Although only one family member is claiming Ben, the IRS would consider Katie and Martha’s choice an error and Martha could be required to pay back the credit upon audit. The complexity of the current rules can result in traps for the unwary where taxpayers don’t meet the technical letter of the law even in instances where only one taxpayer claims the child (which is overwhelmingly the case).
Other times, complexity can lead to no one in the family being eligible for the CTC. Imagine instead: Ben’s older cousin Deborah took him in after Katie started treatment. Katie is not living with Ben.
Similarly to Jessica and David, the interaction of the current earnings and child claiming rules would mean no one in the family is eligible for the CTC. Ben’s caretaker and cousin Deborah would not be eligible to claim Ben because “cousin” is not one of the listed types of family relationships that are eligible (see Note 2). Ben’s mother Katie would not be eligible because she did not live with Ben for over half the year. This means a loss of up to $2,200 in CTC and more in other child-related benefits in financial support for Ben’s care.
The CTC Should Be Updated to Reflect the Realities of Families’ Lives
As the CTC continues to play a major role in our nation’s support for children, policymakers should examine opportunities for the tax code to better reflect the realities of families today and to simplify and improve families’ experience with the IRS in this area.
Notes
1. Custodial parents may file Form 8332 to release claim to a child for the CTC and child for other dependents, so Jessica could theoretically assign the CTC to David, Ryan’s father. However, this form is not often utilized and is not available for other child-related provisions including the Earned Income Tax Credit, the Child and Dependent Care Tax Credit, and purposes of filing status.
2. A taxpayer could be eligible to claim the child if they are their child, grandchild (or other descendant), sibling (or descendants of such a person as a niece or nephew).