The federal Child Tax Credit may soon get an expansion as part of a push from some lawmakers to ensure that more U.S. families can tap the nearly three-decade old benefit.
On Tuesday, leaders of congressional tax committees announced a deal to expand the CTC and extend some business tax credits. While passage isn't guaranteed, anti-poverty advocates say the deal is an important step toward fixing some of the problems with the tax credit, which was designed to shore up families' economic security yet that has excluded many of the poorest children.
The overhaul would also come more than two years after the expiration of the expanded Child Tax Credit, which sweetened the benefit to as much as $3,600 per child and paid out half of the tax benefit via six monthly checks in 2021. That effort was credited with lifting millions of children out of poverty and supporting their parents, who typically used the extra money for preschool, clothing and other kid-related costs.
Despite its popularity, the expanded tax credit expired in 2021, and in 2022 the benefit reverted to its earlier limit of $2,000 per child. That has had a dire impact on many low-income families, experts said.
"Millions of parents are facing increasing financial challenges due to rising food prices, high child care costs, and the resumption of student loan payments," stated Ailen Arreaza, executive director of ParentsTogether Action, a national family advocacy group.
According to Arreaza, the new agreement is an important step in expanding the Child Tax Credit (CTC) for low-income families.
Here's what you need to know about the proposed changes to the child tax credit:
What is the problem with the current CTC?
For years, policymakers have criticized the structure of the CTC, pointing out that it excludes some of the poorest children in America.
The tax credit is based on a parent's income, which means that families with little or no income may not qualify for the CTC.
Currently, parents can claim up to $2,000 in tax benefits through the CTC for each child under 17 years old. However, the income requirement of at least $2,500 excludes many of the poorest families.
An analysis conducted in 2020 by researchers from Stanford University and the University of Michigan revealed that "virtually all children living in households in the top half of the income distribution qualify for the full credit amount," while the "vast majority of children living in households in the bottom decile of the national income distribution are completely ineligible."
How does the congressional deal change the CTC?
The recent congressional deal brings significant changes to the child tax credit (CTC) that will benefit more families. These changes aim to make it easier for families to qualify for the credit and receive a higher refund in their annual tax return.
One of the key changes is that taxpayers can now use their income from either the current or prior year to calculate the CTC. This flexibility is particularly helpful for individuals whose income drops, preventing them from qualifying for the tax credit. This provision will take effect starting from the 2024 tax year.
Another change involves the calculation of the CTC's refundable tax credit. Currently, the calculation is based on multiplying a parent's income by 15%, which can limit the benefit for low-income families with multiple children. Under the new calculation, the parent's income will be multiplied by 15% as well as by the number of children in the family. This adjustment aims to provide a slightly higher benefit to more poor families.
The third tweak focuses on the partially refundable nature of the CTC. This means that if you don't owe taxes or are receiving a refund, you can receive up to $1,600 back in your annual tax refund. However, under the new provision, the maximum refundable amount per child will increase to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025.
How many kids would benefit from the CTC changes?
About 16 million kids from low-income families would benefit, according to the Center on Budget and Policy Priorities, a liberal-leaning think tank that has pushed to expand the CTC. A quarter of those families would gain more than $1,400 in the first year, their analysis found, while another 40% would receive $1,000 or more.
Would middle-class families also get a boost?
Aside from the expansion of the CTC's refundable amount, millions of families would benefit from an annual adjustment for inflation in 2024 and 2025. For instance, if inflation is 5% for one of those tax years, the CTC would be adjusted upwards by $100.
Would the CTC's monthly checks return?
No, the deal in Congress doesn't include the return of the CTC's monthly payments, despite urging from anti-poverty advocates and Democratic lawmakers.
Instead, families with children under 17 can claim the CTC when they file their annual tax returns. If they don't owe taxes or are already getting a tax refund, they can get up to $1,800 added to their 2023 tax refund. (Most taxpayers will file their 2023 tax returns prior to April 15 this year.)
