House/Senate Plans Boost Child Tax Credit, Not For Low-Income Families

Forbes

3 days ago

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The Senate Finance Committee has issued draft reconciliation text that mirrors much of the narrowly passed One Big Beautiful Bill Act (OBBBA) from the House. Both would increase the maximum child tax credit (CTC) and restrict eligibility among citizen children who live in families whose parents are not both US citizens. Neither would increase benefits for the 17 million children who live in families that receive less than today's $2,000 per child credit maximum —though Congress has options to do so. Increasing the CTC for very low-income families could also help offset program cuts elsewhere in the legislation that would affect these families.
Both plans boost the maximum CTC
The House bill would increase the maximum per child credit to $2,500 through 2028, at which point it would drop to an estimated $2,100. From that point on, the credit would be indexed for inflation.
The Senate Finance Committee's draft would permanently increase the maximum per child credit to $2,200 beginning in 2025 and index it for inflation.
In general, increasing credits to keep pace with inflation stops the erosion of benefits as prices rise. Adjusting the CTC for inflation would put this critical program for children on par with benefits for the elderly that already grow with prices.
Under both proposals, the maximum allowable refundable portion of the CTC would continue to grow with inflation, as it has done since the Tax Cuts and Jobs Act (TCJA) of 2017.
Rules that limit how the credit phases in with earnings would remain unchanged, so families with earnings in the phase-in range of the credit today would see no additional benefit from either proposal. Others would see a limited benefit if they did not have enough tax liability to offset with the higher proposed maximums.
Proposed Child Tax Credit, Maximum Credit 2025-2034
Both plans add restrictions on mixed-status families
Since 2018, the $2,000 CTC has only been available to children with Social Security Numbers (SSNs). When this TCJA restriction went into effect, about 1 million children no longer qualified for the benefit (but some did qualify for the smaller $500 credit for other dependents).
Both the House-passed OBBBA and the Senate Finance Committee draft would continue this restriction on children and apply a new one to parents. Under the House plan, both parents of a child would need an SSN to claim the benefit while under the Senate Finance Committee draft, at least one parent would need an SSN. This new parental restriction in the House plan would eliminate an additional 2 million children from the higher CTC level, as noted in recent testimony by the chief of staff of the Joint Committee on Taxation. The Senate Finance Committee restriction would have a somewhat smaller effect.
The House plan adds a new restriction on married couples who file separately
Married filing separately is a relatively rare tax filing status that allows married couples to file their taxes on separate returns instead of jointly. Filing separately may render married couples ineligible for certain tax benefits including the earned income tax credit, credits that help pay for college (the American Opportunity Tax Credit and the Lifetime Learning Credit), and the premium tax credit and the child and dependent care tax credit. But under current law, married taxpayers who file separately can claim the CTC.
The House plan would eliminate eligibility for the CTC for married couples who file separately (the Senate Finance Committee draft does not make this change). Requiring couples to file jointly may bolster the new SSN requirement in the House plan because it would prevent married couples with only one SSN holder from getting the CTC by filing separately. But it would also risk the credits of some survivors of domestic violence, who may become ineligible for the CTC (unless new legislation to change the tax treatment of survivors of domestic violence is adopted) as well as military personnel stationed abroad who marry noncitizens (as happened with stimulus checks).
The House's plan means fewer children with SSNs would get the full CTC
If the House-passed OBBBA becomes law, TPC estimates that in 2026, the number of children with SSNs who live in families that do not receive the full $2,500 CTC will jump from 17 million to over 26 million, more than 1 in 3 children in the US (Table 2). Primarily, it is because the credit's TCJA phase-in rules would remain. It's also because of the cuts directed at children with SSNs who have at least one parent that is not a US citizen: TPC estimates 500,000 children with SSNs would receive no benefit from the CTC because of the new restriction on these families and another 1 million will move from receiving the full credit to receiving less than the full CTC (up to a maximum of $500 per child as part of the other dependent credit).
When more families cannot receive the full benefit of the CTC, the CTC is less able to reduce income inequality. Under both House and Senate plans, more low- and middle-income families would receive a partial credit, while their peers in all but the highest-income families would receive the full credit.The House and Senate have options to help more low-income families
Research shows that increasing the CTC for low-income children and young children generates the greatest returns from this investment. My colleagues and I outlined several options, including phasing the credit in as soon as families begin to earn income (boosting the credit by $375 for most low-income families who currently receive the CTC) and phasing the credit in on a per-child basis, rather than per tax return (doubling the credit for many low-income families with two children). Both options would cost little relative to the proposed CTC expansion being proposed and would direct almost all of the additional benefits to families in the bottom one-fifth of the income distribution.
The House plan and the Senate Finance Committee draft would both expand the CTC – but not for low-income families. Expanding the CTC to include more low-income families—including those with children who are US citizens—would be a sound investment in our nation's future.