Recently, the U.S. House of Representatives, the chamber controlled by the Republicans recently passed a bill that makes some changes and updates to the child tax credit. This was quickly spun as either a middle class tax cut, or raising taxes on the poor. It won’t pass anyway (what does in Washington these days) but it’s weird to see how people can distort what is really happening in order to fit their own agenda.
Child Tax Credit Basics
The child tax credit is a credit. This is different than a tax deduction. A deduction is something that reduces your taxable income. The actual amount you save on your taxes then is a fraction of the amount deducted. For example, if you made $80,000 and you get $20,000 in deductions, then you pay taxes only on $60,000 in income.
A credit, on the other hand, is a reduction not in your income, but in your actual tax. So, a $1,000 tax credit means you actually pay $1,000 less in taxes. A credit, is much better than a deduction for the same amount.
Child Tax Credit Nuance
The thing that makes this discussion weird is that a tax credit is typically supposed to reduce the amount of taxes you pay, dollar for dollar. So, if you owe $5,000 in taxes and you have a $1,000 child tax credit, then you only pay $4,000 in taxes.
So far, so good.
But, what if you only owe $600 in taxes. If you have a qualifying child, you qualify for a $1,000 tax credit. Except you don’t owe $1,000, so normally in tax law, that means you owe $0. You don’t usually get a credit on something you didn’t pay in the first place.
If you go to the grocery store with a $10 off purchase coupon, but you buy something that costs $2, they only give it to you for free. They don’t give you an extra $2. The child tax credit, however, does work just like that. It specifically allows people to claim a full credit even if they owe no taxes, so long as they meet a minimum income limit.
As long as you have at least $3,000 in income, you get to claim the child tax credit. If you only have $3,000 in income, you already owe zero taxes. However, since you can claim $1,000 credit, you can actually get a $1,000 from the government.
Before 2009, this minimum was $10,000. The lower minimum is schedule to expire in 2018. This is standard phony Washington political accounting. By saying that the credit ends in 2018, when the CBO projects the deficit, they make the calculation based on that credit expiring, even though it will likely be extended. This is the reason Republicans passed the Bush tax cuts with a 10-year expiration. Otherwise, it made the deficit too big. Nevermind that they were hoping they would end up being permanent. It’s also why the alternative minimum tax, or AMT, is only adjusted one year at a time. (What this tells you, is that the future deficit projections are actually much worse than reported because many, if not all of these little expiring tax things are fully expected to keep going.)
So, what did the Republicans do to raise taxes on the poor?
Well, nothing. They didn’t change that part of the law at all. They left the expiration right where it is. It could expire in a few years, or it could be extended.
What they did do was change the limit at which the child tax credit phases out for married taxpayers. You see, if you make too much money, you don’t get to claim the child tax credit. A lot of the tax code works this way. There are income limits to contribute to a Roth IRA or make a deductible IRA contribution, for example.
The amount you can make and still take the credit is higher, per person, if you are filing single than if you married filing jointly. This is part of the so-called marriage penalty. The bill “fixed” that by making the married limit higher, equal to the amount each person would get if they were single.
Thus, if you are married filing jointly at the upper end, you can now claim the child tax credit that you couldn’t before. This is the “tax cut for the rich” part, although the child tax credit income limit goes to $150,000 per year, which is a bit less than what most people consider rich.
It also makes this one of the tax numbers that adjusts each year for inflation, so the credit would keep up with rising costs over time.
What Really Happened with Child Tax Credit?
So, who is telling the truth about the child tax credit?
Unfortunately, it really does depend on your point of view. One can certainly see why it isn’t fair that married people can’t claim the same credit that single people do. One can also certainly see why it may be helpful to continue giving the full credit to very low income people.