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Working Paper

The Work Incentive and Employment Effects of Eliminating the Child Tax Credit’s Annual Income Requirement

American Enterprise Institute

January 19, 2024


Senior House and Senate tax committee leaders agreed to a framework for modifying the Child Tax Credit on January 16, 2024. The most consequential reform would eliminate the Child Tax Credit’s annual income requirement by allowing individuals to calculate their eligibility using their current or prior year’s income, whichever year maximizes the family’s benefit. We show that for the vast majority of families who work regularly, this reform would—every other year— eliminate the Child Tax Credit’s work incentive and lead over 700,000 parents to stop working. For the minority of families who do not work in any given two-year period, the Child Tax Credit’s work incentive would be doubled every other year and lead 395,000 parents to start working. We also discuss how the reform would affect the incentive to work more or fewer hours. We conclude that this reform would have important impacts on the labor market that require further study before being considered for passage by Congress.

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The Child Tax Credit (CTC) is a partially refundable tax credit that encourages work and supports families with children. In its current form, the CTC provides families a maximum benefit of $2,000 per dependent child under age 17. Families with an insufficient federal income tax liability to qualify for the maximum credit on behalf of each of their dependent children can still qualify for the refundable portion of the CTC, currently up to $1,600 per dependent child. Families must have earnings during the tax year in order to qualify for the refundable portion of the CTC. For every dollar earned above $2,500, the family receives a $0.15 CTC benefit. This is often referred to as the CTC’s work requirement, because a family with no earnings is not eligible to receive the refundable portion of the CTC (and is unlikely to qualify for the nonrefundable CTC either unless they have substantial taxable unearned income).

In 2021, motivated as pandemic-related relief, the American Rescue Plan Act (ARPA) modified the CTC in substantial ways for one year only (117th Congress 2021). First, the maximum CTC benefit was increased to $3,600 per child aged 0 to 5 and $3,000 per child aged 6 to 17.1 Second, the CTC was paid in monthly allotments of $300 (or $250 for older children) from July through December of 2021, with the remaining half of the increased annual credit amount paid when families filed their taxes in early 2022. Third, the entire credit was made fully refundable and the work requirement was eliminated. This meant that families with no earnings and no tax liability received the same (maximum) CTC as families that did have earnings and a tax liability.

Read the full report.