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 typicallyused 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.
"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," said Ailen Arreaza, executive director of ParentsTogether Action, a national family advocacy group, in a statement.
The new agreement represents an important step "by expanding the CTC for some of the lowest income families," she added.
Here's what to know about the proposed changes to the child tax credit.
What is the issue with the original CTC?
For years, the structure of the CTC has come under fire from some policymakers, who have pointed out that the benefit excludes some of America's poorest children.
That's because the tax credit is based on a parent's income, which means that a family with little or no income may not qualify for the CTC.
Parents can claim up to $2,000 in tax benefits through the CTC for each child under 17 years old. The tax credit is based on income, requiring that parents earn at least $2,500 to claim it, which excluded many of the poorest families.
One 2020 analysis from researchers at Stanford University and the University of Michigan found 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 agreement would make it easier for more families to qualify for the child tax credit, as well as to get more money back in their annual tax refund.
First, taxpayers could use their income from either the current or prior year in calculating the CTC, which is helpful if their income drops and they can't qualify for the tax credit. This would go into effect with the 2024 tax year.
Second, the calculation to determine the CTC's refundable tax credit would be changed to help more poor families receive a modestly higher benefit. Currently, the calculation is based on multiplying a parent's income by 15%, which can limit the tax credit for poor families with more than one child. The new calculation would multiply the parent's income by 15% as well as by the family's number of children.
A third tweak is linked to the partially refundable nature of the CTC, which provides up to $1,600 back in your annual tax refund if you don't owe taxes or you are getting a refund. Under the provision, the maximum refundable amount per child would rise 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.)
- Child Tax Credit
Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.
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I'm an expert in tax policy and social welfare programs, with a comprehensive understanding of the Child Tax Credit (CTC) in the United States. My knowledge extends to the historical evolution, legislative changes, and the broader impact of the CTC on families and children. I'll provide an insightful analysis of the concepts mentioned in the article from MoneyWatch, authored by Aimee Picchi and updated on January 16, 2024.
Key Concepts in the Article:
Child Tax Credit (CTC):
- The CTC is a federal benefit designed to enhance the economic security of families with children.
- It has been in existence for nearly three decades, and the article discusses an ongoing effort by lawmakers to expand it.
Recent Congressional Deal:
- Congressional leaders have reached a deal to expand the CTC and extend certain business tax credits.
- This deal aims to address issues with the original CTC and make it more accessible to low-income families.
Previous Expansion and Expiration:
- In 2021, there was an expanded version of the CTC, offering up to $3,600 per child, with half of the benefit distributed through monthly checks.
- This expansion played a crucial role in reducing child poverty, but it expired in 2021, reverting to the original limit of $2,000 per child in 2022.
Issues with the Original CTC:
- Critics have long pointed out that the structure of the CTC excludes some of the poorest children, as it is based on a parent's income.
- Families with little or no income may not qualify for the CTC, and the eligibility threshold requires parents to earn at least $2,500.
Proposed Changes in the Congressional Deal:
- The agreement aims to make it easier for more families to qualify for the CTC and receive a higher benefit.
- Taxpayers can use income from either the current or prior year for calculating the CTC, starting in the 2024 tax year.
- Changes to the calculation of the CTC's refundable tax credit, benefiting poor families with more than one child.
- Increase in the maximum refundable amount per child over the years 2023 to 2025.
Number of Benefiting Children:
- Approximately 16 million children from low-income families are expected to benefit from these changes, according to the Center on Budget and Policy Priorities.
Impact on Middle-Class Families:
- Middle-class families would benefit from the expansion of the CTC's refundable amount and an annual adjustment for inflation in 2024 and 2025.
Monthly Checks and Exclusion:
- The deal does not include the return of monthly CTC payments, contrary to the previous expanded version in 2021.
- Families with children under 17 can claim the CTC when filing annual tax returns.
Advocacy and Criticism:
- Anti-poverty advocates see the deal as an important step, especially for the lowest-income families.
- Criticism includes the exclusionary nature of the CTC based on income and the absence of monthly payments in the deal.
In conclusion, my expertise in tax policy allows me to provide a thorough understanding of the complexities surrounding the Child Tax Credit and the proposed changes outlined in the congressional deal discussed in the article.