The House of Representatives has successfully passed a bill aimed at broadening the scope of the Child Tax Credit (CTC). The proposed legislation outlines a phased introduction of a refundable portion of the CTC, with the maximum refundable amount per child set to increase to $1,800 in the tax year 2023, $1,900 in 2024, and $2,000 in 2025.
Under the provisions of the bill, taxpayers would retain the flexibility seen during the Covid pandemic, allowing them to utilize either the current tax year or prior tax year earned income to calculate the credit. Additionally, the value of the credit would be adjusted to account for inflation.
However, amidst the discussions surrounding the bill, there is noticeable confusion among taxpayers regarding the specifics of the CTC – what it encompasses and what it doesn’t. To clarify, the CTC is designed to provide families with a tax break of up to $2,000 per qualifying child.
For the 2023 tax year, a qualifying child must meet a set of criteria, including being under the age of 17 at the end of the tax year, having a specified relationship to the taxpayer, not providing more than half of their own support during the year, and meeting citizenship and residency requirements.
The child tax credit is also income-dependent, with phase-outs beginning at $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers.
For example, if a single taxpayer earns $201,000 and is qualified for a $2,000 credit, the credit would be reduced by $50 since the individual’s income exceeds the $200,000 level, leaving $1,950 as the available credit.
Bill Proposes Enhanced Child Tax Credit
However, the bill intends to raise the maximum tax credit per kid, with provisions for further increases in 2024 and 2025 to account for inflation, beginning at $2,000 for the tax year 2023.
There is no limit on the number of children that qualify for the credit as long as they satisfy the IRS’s requirements, which include living with the taxpayer for at least half of the year and being claimed as dependents.
As lawmakers strive to pass the tax package promptly for the upcoming filing season, the IRS assures taxpayers that if eligible for a larger refund under the proposed expansion, adjustments will be made automatically.
Looking ahead, the proposed changes envision a broader reach in 2024 and 2025, featuring a higher maximum credit, increased refundability, and greater flexibility in income calculations. Notably, the credit is anticipated to become fully refundable in 2025, offering families the full benefit even if they do not owe federal income taxes.
In addition, a “lookback” provision that would enable families to use income from the previous two years for a more beneficial credit computation would be implemented beginning in 2024. It is important that the child tax credit’s latest expansion and earlier increases are scheduled to expire in 2026 unless they are extended by Congress, which would return the maximum credit amount to $1,000 per kid.