The child tax credit from $400 to $2,000, told bill by bill

It took Washington three years, a presidential veto, and a balanced-budget fight to give American parents four hundred dollars per child. Think about the effort. The Treasury moved faster to name a new building than it did to hand a family the price of a used lawn mower for each kid.

That is how the child tax credit began. It was a promise printed in a campaign document, vetoed once, then signed in a bill with a very long name, at an amount that looks quaint now. And yet that small thing grew, over about two decades and five major laws, into one of the largest tax benefits in the code for working families. This post walks the dates in order, explains the single idea that confuses everyone, which is the difference between a refundable and a nonrefundable credit, and ends with what you should check for yourself, because the numbers have changed more than once since the last chapter we write here.

First, what a credit is

A tax deduction reduces the income that gets taxed. A tax credit reduces the tax itself, dollar for dollar. If you owe $5,000 and have a $2,000 credit, you owe $3,000. A deduction of $2,000 would cut your taxable income by $2,000, saving you whatever your tax rate times $2,000 comes to. For a family in a 12 percent bracket, that is $240. The credit saves $2,000. That is the whole difference, and it is why Congress, when it wants to help families in a way families can feel, writes a credit. We compare the two in four families, one tax change, and how a deduction differs from a credit.

The 12 percent figure is simply a worked example, not a statement about any particular year's bracket. The arithmetic is $2,000 times 0.12, which is $240.

Refundable versus nonrefundable

Here is the idea that trips people up. A nonrefundable credit can reduce your tax bill to zero, but no further. If you owe $1,000 and have a $4,000 nonrefundable credit, you use $1,000 of it and the rest is wasted. A refundable credit can reduce your bill below zero, so the government sends you the difference as a refund.

The child tax credit is a hybrid. The main credit is nonrefundable, and a portion is refundable, called the additional child tax credit. The refundable portion is usually limited by a dollar cap per child and by a formula tied to how much you earned. That earnings link is the heart of the political argument, because it ties the credit to work. Keep that in mind; we come back to it.

Here is a worked example, using the rules that applied from 2018. It is hypothetical, with invented families, to show the mechanics.

• Family A has two children under 17 and owes $5,000 in income tax before credits. The credit is 2 x $2,000 = $4,000. All of it fits against the $5,000 tax bill. The family owes $1,000. Benefit: $4,000.
• Family B has two children, earns $30,000, and owes $1,000 in income tax before credits. The credit is $4,000. The nonrefundable part uses $1,000, leaving $3,000 unused. The refundable portion is the smallest of three numbers: the unused credit ($3,000), the cap of $1,400 per child (2 x $1,400 = $2,800), and 15 percent of earnings above $2,500 (0.15 x $27,500 = $4,125). The smallest is $2,800. Total benefit: $1,000 + $2,800 = $3,800. The remaining $200 is lost.
• Family C has two children and earns $10,000, owing no income tax. The refundable portion is the smaller of $2,800 and 0.15 x ($10,000 - $2,500) = 0.15 x $7,500 = $1,125. Benefit: $1,125.
• Family D has two children and earns $2,000. Earnings are below the $2,500 floor, so the formula gives zero. Benefit: $0.

Look at the four cases. The credit rewards work: the more a low-income family earns, up to a limit, the more of the credit it can collect. That is not an accident of drafting. It is the design.

The timeline, bill by bill

Each date below is a bill, a veto or a promise. Follow them in order.

1994: the promise

On September 27, 1994, Republican House candidates signed the Contract with America. One of its planks was a tax credit of $500 per child. The idea had a simple, moral logic: raising a child costs money, and the tax code should recognize it. Before the credit, the tax code had a personal exemption for dependents, a deduction. A credit is worth more to a family in a lower bracket, and it makes the recognition of children visible as a line on the return.

In November 1994 Republicans won the House. Their contract bills moved in 1995, and the child credit was part of the House's tax package. The story of how that contract also produced the 1996 welfare law is in two vetoes, one signature and the 1996 welfare law that put marriage in statute.

December 6, 1995: the veto

The $500 credit was folded into the Balanced Budget Act of 1995, a large package of spending and tax changes. President Clinton vetoed it on December 6, 1995. The veto was aimed at the package as a whole, and the credit went down with the bill. This is the first date in the story, and it is a reminder that good ideas often have to survive a bad vehicle.

August 5, 1997: the Taxpayer Relief Act

Two years later, a Republican Congress and President Clinton reached a balanced-budget agreement in 1997, and the Taxpayer Relief Act of 1997 was signed on August 5, 1997. The child tax credit was in it. The terms:

• $400 per child for 1998.
• $500 per child beginning in 1999.
• Children under 17 qualified.
• Phase-outs began at $75,000 of income for single filers and $110,000 for married couples filing jointly.
• The credit was largely nonrefundable, with a limited refundable rule for families with three or more children.

That is the birth certificate. Notice the figure: not $500 at the start, but $400, a compromise number. The credit that began as a Republican campaign promise became law through a Democratic president's signature in a bipartisan budget deal.

June 7, 2001: $1,000

President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 on June 7, 2001. It did two things to the child credit.

First, it raised the amount toward $1,000 per child in steps over several years. Second, and this mattered more for lower-income working families, it made part of the credit refundable for everyone, not just families with three or more children: the refundable portion was set at 10 percent of earned income above $10,000, with the rate rising to 15 percent later in the decade. That is the "additional child tax credit" that families still see on the form.

In May 2003, the Jobs and Growth Tax Relief Reconciliation Act sped up the increase, bringing the credit to $1,000 per child for 2003 and 2004. Later legislation extended the $1,000 level. We place these changes in the context of the broader tax cuts in The 2001 and 2003 Bush tax cuts and why they came with an expiration date.

February 2009: a lower earnings floor

In the American Recovery and Reinvestment Act, signed in February 2009, Congress lowered the earnings threshold for the refundable portion from about $10,000 to $3,000. That meant more low-earning working families could receive part of the refundable credit. The change was temporary at first and was extended. It is the sort of detail you never see on a cable news graphic, but it shaped what thousands of working families received.

December 22, 2017: $2,000

The Tax Cuts and Jobs Act was signed on December 22, 2017. It doubled the credit from $1,000 to $2,000 per child under 17 and changed the structure in four ways that deserve attention.

1. The amount: $2,000 per qualifying child.
2. The phase-out: the credit began to shrink only at $200,000 of income for single filers and $400,000 for married couples filing jointly, up from $75,000 and $110,000. Far more middle-class families became eligible for the full amount.
3. The refundable portion: up to $1,400 per child, with a rule that 15 percent of earnings above $2,500 counted toward it.
4. A new $500 credit for other dependents, such as older children and elderly parents the taxpayer supports.

A Social Security number requirement for each child was added, as well. For the full picture of the 2017 law, see five changes in the 2017 tax law that reached the kitchen table.

The Rubio-Lee fight over the refundable part

The refundable portion was where the intraparty argument happened in late 2017. Senators Marco Rubio and Mike Lee argued that the credit should do more for working families who owe little income tax but pay substantial payroll taxes. A family earning a modest wage pays Social Security and Medicare taxes on every paycheck, and for that family, the payroll tax is the larger bill. Their push was to make a greater share of the credit refundable. The final law's cap of $1,400 per child was higher than in earlier versions of the Senate bill.

Other Republicans were skeptical. Their argument was the one we make about welfare reform: a credit that pays out of the Treasury to people who owe no income tax is a transfer program wearing a tax-credit costume, and it should be tied to work. The compromise was exactly that: refundable, but tied to earnings.

I think the compromise holds up, and the reason is the point of the whole exercise. A credit that rewards work respects the family that earns its living and also helps it. We apply that standard to a later, bigger expansion in Should the child credit pay families who don't work? The 2021 argument.

One hypothetical family across the years

Numbers on a timeline are easy to skim. Let us put them on one invented household: a married couple in a Midwestern town with two children under 17, and enough tax liability to use the full credit. This is a hypothetical, not a real family.

Read down the right-hand column. The same two children went from an $800 credit to a $4,000 credit. The increase from 1999 to 2018 is $4,000 - $1,000 = $3,000, a fourfold rise in the nominal dollar amount. I say nominal on purpose: prices rose over those nineteen years, so part of the increase simply kept pace. How much, I will not guess here. The Bureau of Labor Statistics publishes the consumer price index, and the honest way to compare is to use its inflation calculator. What you can say without a calculator is that the credit did not merely keep pace with the lawn-mower prices of the first year. It grew into a larger share of what it costs to raise a child.

Why a credit and not a bigger exemption

You might ask why the early Republican plan chose a credit at all, when it could have increased the dependent exemption. The argument for the credit has three parts, and the argument against it deserves its turn too.

For the credit:

1. It is the same size for everyone. An exemption is worth more the higher your bracket. A $1,000 exemption saves a family in a high bracket more than a family in a low one. A credit is the same dollar amount for both, which many people find fairer.
2. It is visible. A credit shows up as a line item that a parent can point to. A change in an exemption disappears into the arithmetic.
3. It can be aimed. Congress can phase a credit out at a chosen income, and it can decide whether any part is refundable. The exemption is blunter.

Against it, a serious critic would say that the exemption treats children as a reduction in a family's ability to pay, which is how the tax code ought to see them, while a credit looks like a government payment. There is something to this. A child is not a favor the Treasury does for you. A family that raises children bears a cost that the income tax, in theory, should not ignore. That is the philosophical root of the idea, and it is why I think the best defense of the credit is not generosity but fairness: the family raising the next generation of taxpayers should not be taxed as if it were childless.

Both views are respectable. The credit won in 1997 because it was the instrument that could pass a Congress and a president who had to agree on something.

What happened after 2017

The 2017 law's individual provisions were written to expire after 2025, with the credit scheduled to return to a lower amount. Congress later passed further legislation that changed the credit again. I will not state the current figure here, because it has changed and may change again. The amount, the age limit, the phase-outs and the refundable cap are all spelled out on the IRS website, in the instructions for Schedule 8812, and in the text of the law on Congress.gov. If you are filing a return, read the current year's instructions.

What the story teaches

Three points.

1. Good tax policy is often slow tax policy. From promise to law took three years; from $400 to $2,000 took twenty. The credit grew because it was popular with families in both parties.
2. The design carries the philosophy. The refundable part's link to earnings is not an accident. It reflects a view, shared by most conservatives, that help should reinforce work.
3. The pro-family case is on the books. When critics say the party that protects the unborn does nothing for families, the credit is one answer. We take up that charge directly in 'Pro-life stops at birth' is the line to answer, so let's answer it.

The bottom line

• The child tax credit began as a 1994 Contract with America promise of $500, survived a December 1995 veto, and was enacted at $400, then $500, in the Taxpayer Relief Act of 1997.
• It rose to $1,000 under the 2001 and 2003 laws and to $2,000 under the Tax Cuts and Jobs Act of December 2017, with much higher income phase-outs.
• A nonrefundable credit stops at zero tax. A refundable credit can pay you a refund, but the child credit's refundable part is capped and tied to earnings.
• The numbers have changed since 2017 and may change again. Check the IRS instructions for the tax year you are filing, not this post, for the current amounts.
• If you are a working parent, run the worksheet in the Schedule 8812 instructions every year. A credit you do not claim is money you left with the Treasury.