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Expanded child tax credit in the American and Reinvestment Act of 2009 (MS Word)

Expanded child tax credit in the American and Reinvestment Act of 2009 (.pdf)

Expanded child tax credit in the American Recovery and Reinvestment Act of 2009

Dear Reader,

I am writing regarding a provision in the recently enacted “American Recovery and Reinvestment Act of 2009” which expands the child tax credit for millions of children in low-income working families. Here are the details.

Currently, a taxpayer receives a $1,000 tax credit for each qualifying child under the age of 17. To the extent the child tax credit exceeds the taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit) equal to 15% of earned income in excess of a threshold dollar amount. The threshold dollar amount was $8,500 in 2008.

The new law increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the earned income threshold to $3,000. This means that working families with earnings above $3,000 may qualify for at least a partial credit.

This change is significant because families with earnings just above the threshold qualify for a very small credit, because eligibility phases in slowly, at a rate of 15 cents per dollar of earnings above the threshold level. As a result, where the threshold is set has a large effect on families with incomes thousands of dollars above the threshold. For example, under the $8,500 threshold that applied for tax year 2008, a family with two children did not qualify for the full credit of $1,000 per child unless it had earnings of at least $21,833. Under the new law, such a family will qualify for the full credit when its earnings reach $16,333.

As a result of the change under the new law, an estimated 2.9 million more children will qualify for the credit than would have qualified under last year's $8,500 earnings threshold, and an estimated 10 million children who would have received a partial credit under the $8,500 threshold will receive a larger one under the new legislation.

If you would like more details about this or any other aspect of the new law, please do not hesitate to call.