The Child Tax Credit — An Explainer

Updated February 1, 2024
The House recently passed a bipartisan tax package that would expand the federal Child Tax Credit. The legislation will next be considered by the Senate. Information about the plan is included below.

What is the Child Tax Credit?

The Child Tax Credit (CTC) is one of the most effective tools to help families manage the rising cost of raising children. The program provides financial relief to American taxpayers with dependent children and has lifted millions of children out of poverty. Congress expanded the program in 2021 to provide up to $3,600 per year for each child under age 6 and $3,000 for each child aged 6 to 17. The expansion allowed many taxpayers to receive some of the credit as advance monthly payments and also eliminated minimum income requirements. This critical change allowed families with the lowest incomes to receive the full benefit for the first time.

Despite studies showing that the expanded Child Tax Credit cut child poverty nearly in half, Congress failed to renew the expansion in 2022. At a time when the costs of basic daily needs like housing, child care, food, and utilities are higher than ever, the families who earn the least will again have less or no access to the credit. Even those who retain it will see dramatic reductions.

Why is the Child Tax Credit important?

Lowers the cost of living for working families. Reaching more than 36 million households, including many essential workers with low income, expanded Child Tax Credits were primarily used for immediate needs like food, utilities, housing, clothing, and education expenses. The tax benefits also support local economies. Every dollar of a Child Tax Credit generates $1.50 to $2 in local spending.
Dramatically reduces child poverty. Nearly 3 million children were lifted out of poverty in just one year of expansion, resulting in a child poverty rate that fell by 46 percent to a record low. Rolling back the improvements makes the credit eight times less effective at reducing child poverty. In the year following the expansion rollback, almost 4 million children are estimated to have fallen back into poverty. The impact of child poverty, including poor outcomes in health, education, and economic mobility, cost the nation between $800 billion and $1.1 trillion each year.
Improves rural and racial equity. Before expansion, 27 million children in families with the lowest income – including half of all rural, Black, and Hispanic children received less or no help from the Child Tax Credit. Roughly one in three rural kids were unable to receive the full credit because their families didn’t earn enough to qualify. By eliminating the minimum income requirement, the expansion ensured that almost all children received the full benefit amount for the first time.
Builds long-term opportunity. Researchers estimate that making the expanded Child Tax Credit permanent would cost about $100 billion per year, while generating $1 trillion worth of societal benefits resulting from improvements in education, earnings, health and reduced costs related to child protection and criminal justice. That’s a 1,000 percent return on investment.
Ensures kids and families don’t fall through the cracks. Children have no control over their parents’ income, and people without reproductive rights are denied control over their economic futures. As abortion bans take effect across the country, notably in states that spend the least on families and kids, more babies will be born to people already experiencing financial hardships. The expanded Child Tax Credit is urgently needed in states limiting reproductive freedom.

How are Mainers impacted?

142,000 Maine families with 229,000 children received the expanded Child Tax Credit in 2021. Almost all families with minor children were eligible for the expanded credit, including an estimated 49,000 children under 17 who currently receive less than the full credit or no credit at all because their families’ incomes are too low.
When federal and state supplemental assistance like the Child Tax Credit were factored in for the three-year period between 2019 and 2021, Maine ranked among the eight states with the lowest child poverty rates in the nation. In 2021, the expanded CTC led to an estimated 40 percent reduction in Maine’s child poverty rate.
88 percent of Maine families with low income use their Child Tax Credit for basic needs like food, utilities, housing, clothing, and education expenses. Following the expansion rollback, six times more families reported food insecurity and four times more families reported difficulty paying for household expenses.
Maine is one of 12 states that also has its own child tax credit program, the Dependent Exemption Tax Credit, which provides $300 for each qualifying dependent. The Institute for Taxation and Economic Policy estimates that about 153,000 households currently receive this credit. The Maine legislature recently modernized the credit by removing minimum income requirements and indexing the credit to inflation, meaning an estimated 50,000 families with low income (including 35,200 dependent adults and 73,000 children) will now have access to the full benefit, and the credit won’t lose value if inflation rises.

What can be done to restore the expanded tax credit?

On the federal level: A bipartisan tax cut package that passed the House on January 31 would make the Child Tax Credit fully accessible to about 16 million more children in families with the lowest income, including 39,000 in Maine. While more modest than the expansion enacted in 2021, it’s estimated the change would lift at least half a million children out of poverty. In addition to removing the income-based phase-in that resulted in 19 million children in families with the lowest incomes getting less or no credit than wealthier families, the plan contains other important structural improvements: it ensures all children in each family get the same sized credit, allows families whose incomes declined in a year to use a prior year’s earnings to calculate their credit, and takes steps towards indexing the credit for inflation. The bipartisan proposal was negotiated as part of a deal that would also include corporate and small business tax provisions that cost a similar amount (about $35 billion each), with costs offset by rolling back the Employee Retention Credit created during the pandemic. The expansion would be in effect for three years. The legislation now moves to the Senate for consideration.
On the state level: Lawmakers modernized Maine’s Dependent Exemption Tax Credit in 2023 by removing minimum income requirements and indexing it to inflation. That means an estimated 157,000 dependent adults and children in families with the lowest incomes will receive the full credit for the first time and ensures that the credit won’t lose value as a result of economic turbulence. If the expanded federal credit is not restored, Maine lawmakers have the power to make up some of that difference in the next budget cycle by increasing the amount of the state credit.

Did you know…?

The Child Tax Credit was first introduced in 1997 as a $400 income-qualifying credit as part of the Taxpayer Relief Act enacted during the Clinton administration. The credit was later increased and expanded under George W. Bush, Trump, and Biden administrations. The current Child Tax Credit exists as a component of The Tax Cuts and Jobs Act of 2017 and expires at the end of 2025.
The Child Tax Credit’s minimum income requirements mean that a single mom of two making $15,000 per year gets half the credit of a family making $150,000 per year.
87 percent of the anti-poverty impact of the expanded Child Tax Credit comes from eliminating the minimum income requirement.
Only children who are US citizens are eligible for federal Child Tax Credit benefits. About one million children are left behind by this rule, including 500 in Maine.
Researchers recently looked for evidence that the expanded Child Tax Credit reduced participation in the labor force. They found no evidence that it did and, in fact, analysis suggests that like the Earned Income Tax Credit, an expanded Child Tax Credit may actually help increase labor force participation.