TAXES
Congress considers expansion of the Child Tax Credit for 2024: how much would it increase in value?
The Child Tax Credit is one of the largest benefits available to families. How much will it be worth this year? Could new legislation increase the value?
The US Internal Revenue Service will begin processing tax returns and delivering refunds on Monday, 29 January.
One of the most valuable credits that millions of families can claim is the federal Child Tax Credit (CTC). In 2021, as a part of the American Rescue Plan (ARP), the Democratic Congress was able to change the credit structure and increase its value. The CTC was made refundable, and the value was increased from $2,000 per child ($1,600) to $3,600 for children under six and $3,000 for those between six and seventeen. The ARP also mandated that the IRS create a system to distribute monthly payments worth $300/$250 per eligible child, and with around twenty-four million more children able to benefit from the credit, child poverty was cut in half in just one year. Since the expanded credit expired, child poverty rates have surged once again.
While no further legislation was passed to make these changes permanent, a new bill circulating on Capitol Hill would increase the value starting this year. But what are the chances of the legislation passing? Well, with Republicans in control of the House of Representatives, any expansion seems unlikely unless it is paired with a decrease in spending somewhere else in the budget.
How is the credit currently structured?
Taxpayers with eligible children can claim a tax credit of up to $2,000 per child. To claim the partially refundable credit, the taxpayer must have had an annual income above $1,600.
What is the difference between partially refundable and non-refundable tax credits?
The difference lies in whether or not the tax bill owned by a taxpayer affects whether or not the value of the credit will be delivered in their refund. So, if a tax credit is made refundable, as the Child Tax Credit was in 2021 under the American Resuce Plan, families eligible to claim it received the credit regardless of their tax bill.
A non-refundable tax credit, like the $500 Child and Dependent Care Credit, can reduce a tax bill, but it does not make one eligible for a return. For example, say a taxpayer claims the credit for $400 and owes $600 in taxes. The $400 they can claim would be subtracted from the $600, bringing their total amount owed to $200. The Child Tax Credit is worth $2,000 and is partially refundable, which means that $1,600 is refundable, while the remaining $400 can only be used to reduce the tax bill.
A fully refundable credit guarantees a return if the value of the credit brings one’s tax bill to $0, with whatever the remaining balance of the credit is being delivered in one’s return.
The non-refundable portion of the credit will reduce taxes owed dollar-for-dollar. If the taxpayer owes less taxes than the refundable amount, the difference will be added to their tax refund. To claim this credit, the filer must complete Schedule 8812.
Eligible dependents must meet a comprehensive list of requirements relating to the relationship to the taxpayer, the child’s age, the amount of financial support provided by the taxpayer, and their status as a citizen or legal permanent resident. More information on qualifying dependents can be found on the IRS website.
A look at the current proposal to enhance the credit’s value
There is renewed bipartisan interest in expanding the CTC on a more permanent basis in the Senate. Two senators, Democrat Ron Wyden (OR) and Missouri GOP Representative Jason Smith, have released a proposal that would increase the value of the CTC over the next three years until the refundable portion of the credit reached $2,000:
- $1,800 in tax year 2023
- $1,900 in tax year 2024
- $2,000 in tax year 2025.
Another critical component of the proposed legislation would be to tie the value of the credit to inflation, meaning that as prices increase, the value of the credit would offset any losses in purchasing power that higher prices erase.