Lawmakers are working on making the federal Child Tax Credit bigger to help more U.S. families. The leaders of congressional tax committees reached an agreement on Tuesday to expand the Child Tax Credit and extend some business tax credits.
While it’s not guaranteed to become law, advocates against poverty think this is a crucial step to improve the Child Tax Credit, which was created to help families financially but has left out many of the poorest children.
This change comes over two years after the enhanced Child Tax Credit, which increased the benefit to $3,600 per child and distributed half of it through six monthly checks in 2021, expired.
That effort was successful in reducing child poverty and assisting parents, who often used the extra money for things like preschool, clothing, and other child-related expenses.
Even though the expanded tax credit was popular, it ended in 2021, and in 2022, the benefit went back to its original limit of $2,000 per child. This has had a serious impact on many low-income families, according to experts.
“Between rising food prices, the high cost of child care and the resumption of student loan payments, millions of parents are finding it harder than ever to make ends meet,” Ailen Arreaza, executive director, said in a statement.
Here’s what you should know about the child tax credit’s planned modifications.
What is Wrong With the First CTC?
Some lawmakers have been criticizing the CTC’s structure for years, pointing out that some of the nation’s poorest children are not eligible for the benefit.
This is due to the fact that the tax credit is dependent on the income of the parents, so a family with low or no income might not be eligible for the CTC.
With the CTC, parents can receive tax savings of up to $2,000 for each kid under the age of 17. Because the tax credit is income-based and parents must make at least $2,500 in order to qualify, many of the poorest families were left out.
“Virtually all children living in households in the top half of the income distribution qualify for the full credit amount,” according to a 2020 analysis by researchers at Stanford University and the University of Michigan, while “the vast majority of children living in households in the bottom decile of the national income distribution are completely ineligible.”
How Does the New Agreement in Congress Change the Child Tax Credit (CTC)?
The deal makes it simpler for more families to qualify for the child tax credit and receive more money in their yearly tax refund. Here are the key changes:
1. Flexible Income Calculation: Starting in the 2024 tax year, taxpayers can use either their current or prior year’s income to calculate the CTC. This is helpful if their income drops and they wouldn’t otherwise qualify for the tax credit.
2. Improved Refund Calculation: The formula for determining the CTC’s refundable tax credit would change. Instead of multiplying a parent’s income by 15%, the new calculation multiplies both the parent’s income and the family’s number of children by 15%. This helps more low-income families receive a slightly higher benefit.
3. Increased Maximum Refundable Amount: For the partially refundable CTC, the maximum refundable amount per child would increase to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025.
Impact on Kids:
About 16 million kids from low-income families would benefit. A quarter of these families would gain over $1,400 in the first year, while 40% would receive $1,000 or more.
Middle-Class Families:
Apart 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 example, if inflation is 5%, the CTC would be adjusted upwards by $100.
Monthly Checks Return
No, the Congress deal doesn’t bring back monthly CTC payments. 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 receive up to $1,800 added to their 2023 tax refund.
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