There's a frustrating myth people call me about time and time again.
Some people are under the impression that the US government provides some sort of yearly or monthly child stipend, which isn't dependent on work at all.
So here is how it works, to make things simple.
There is something called the child tax credit, which can actually be a used as a tax credit, like it sounds. The total amount is $2000 per child, per year.
A tax credit in it's simplest sense is something which reduces tax, but doesn't provide any additional payment (or refund) to the person.
Here is some history, to explain the inner workings of how and why things have changed over time.
Originally instituted in 1997, it started as a simple $400 tax credit. For low income families whose income was very low, they might not have needed to come onto using the credit at all.
This tax credit was instituted by the Clinton administration in the Taxpayer Relief Act of 1997 as a continuation of a national plan to help get families off Welfare, and encourage work. "Welfare" is a general term to describe assistance form the government. Pre-1997, the AFDC federal assistance program was generally what "Welfare" meant to laymen.
This assistance program had become a major problem, since there was no encouragement or requirement for the recipients of these programs go to work at all.
The fundamentals of this change of policy were delineated in The Welfare Reform Act of 1996. The law fulfilled Clinton's campaign promise to "end welfare as we know it".
The AFDC program was replaced by a much more restrictive TANF program, with generally lower monthly payments, and a requirement to find work within two years. This program is administered by the states. The application is not on a tax return.
Getting back to the child tax credit, in 2003 it was enacted to make $1000 of the credit "refundable". This means that a certain percentage of the parent's entire income can be refunded (up to 15% in certain cases), using this child tax credit amount. Part of the credit is not "refundable" and can only be used as a tax credit. ($500 is non-refundable for the 2022 tax year).
Later on it was increased to $1400, then $1500 for 2022. This refundable amount was meant to encourage parents to work. The federal government provides these payments as a part of the tax return refund, which may consist of other credits, such as excess tax withheld in error.
In cases where the parents have tax to pay, it may simply be used to reduce their taxes, and a tax bill may be left over.
For tax year 2021, a full, increased amount was made refundable, with no requirement to work, due to the COVID pandemic. While the democrats tried to make this permanent, they weren't successful.
So this it the rundown on the child tax credit, which is "applied for" or claimed, on the federal tax return.
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