Child Tax Credit

What is it?
A $500 child tax credit is available to parents of qualifying dependent children.

What's changing?
The child tax credit will double in four stages to $1,000 by 2010. The credit is increased to $600 in 2001, to $700 in 2005, $800 in 2009, and $1,000 in 2010. The credit will also be partly refundable for taxpayers with at least $10,000 of earned income.

What does it mean to me?
The tax cut has a refundable feature that primarily benefits lower- income families. For example, currently a couple with two children and earned income of $15,000 would not get a $1,000 tax credit for two children because their standard deduction and exemptions reduce their taxable liability to zero. Under the new law, they could claim the new refundable feature and qualify for a credit by using this formula:

2001- 2004:	$15,000 - $10,000 = $5,000 x .10 = $500
2005 - after:	$15,000 - $10,000 = $5,000 x .15 = $750

The Details ...
The 2001 Act increases the child tax credit to $1,000, but the phase in period begins in 2001 and is phased in over 10 years. The increased credit would be phased in as follows:

Child Tax Credit Phase-in Timeline
2001-2004	Increases to $600
2005-2008	Increases to $700
2009	Increases to $800
2010	Increases to $1,000

The 2001 Act makes the child tax credit at least partly refundable to the extent that earned income exceeds $10,000. The minimum earned income limit is indexed for inflation after 2001. For 2001-2004, the refundable portion is limited to 10% of the excess of earned income over the minimum amount. For 2005 and later years, the percentage is increased to 15%.

Example: Kyle and Martha Tablor, who have two children, have earned income of $15,000. They have no other income. The Tablors do not have a tax liability because the standard deduction and exemptions reduce their taxable income below zero.

Earned income $15,000

Standard deduction ( 7,600)

Exemptions (11,600)

Taxable income $ 0

Under current law, the couple would not benefit from the child tax credit of $1,200 ($600 x 2), calculated using the proposed 2001 child tax amount. The refundable feature in the 2001 Act results in a 2001 refund of $500 (($15,000 – $10,000) × .10).

The refundable feature also benefits families with more than two children. Current law includes a refundable child tax credit for these families, but the coordination with employment taxes and the earned income credit greatly reduces or eliminates it for many families. The 2001 Act provides that the refundable credit is the larger of the amount under current law or the amount provided under the 2001 Act.

A study of both credits shows that the 2001 Act refundable credit is either greater than or equal to the refundable credit for families with three or more children. The chart below compares the two refundable credits for 2001. The chart assumes that earned income is the only source of income, the couple has three children and does not itemize. The 2001 Act tax rates and child tax credit amount are used in the calculations to derive this information.

Earned Income	Refundable Credit		Benefit over Current Law
Earned Income	Current Law	2001 Act	Benefit over Current Law
$10,000	$0	$0	$0
$12,000	$0	$200	$200
$14,000	$0	$400	$400
$16,000	$0	$600	$600
$18,000	$0	$800	$800
$20,000	$0	$1,000	$1,000
$22,000	$0	$1,200	$1,200
$24,000	$0	$1,210	$1,210
$26,000	$68	$1,210	$1,342
$28,000	$642	$1,210	$568
$30,000	$1,215	$1,215	$0
$32,000	$915	$915	$0
$34,000	$615	$615	$0
$36,000	$315	$315	$0
$38,000	$15	$15	$0
$40,000	$0	$0	$0