But if families are expecting anything like 2021’s temporary turbo charge to the child tax credit, they should think again.
The pandemic-era overhaul to the child tax credit paid up to $3,600 for kids under age 6, and $3,000 for kids age 6 to 17 and distributed half of the money in monthly checks.
Under the current version of the child tax credit, the IRS will pay up to $2,000 per eligible child during the tax season that starts Jan. 29. The new proposal from the Senate and House of Representatives’ top tax writers isn’t changing that.
But a big part of the proposal would tweak the tax credit’s methods to get more of the maximum payout sooner to low-income families.
More of the credit would convert to refund cash starting with 2023 income tax returns, according to the proposal from Sen. Ron Wyden, a Democrat chairing the Senate Finance Committee, and Rep. Jason Smith, a Republican chairing the Way and Means Committee.
When determining the refundable amount, the proposal would have the IRS count the number of kids in a household. It’s a move that could easily boost the payout for some parents, experts say.
For tax year 2024 and tax year 2025, the refundable portion of the $2,000 credit would continue growing. In 2025, the top payout for all households could nudge higher with an inflation adjustment.
Enhancing the child tax credit during the pandemic had a measurable, though temporary, impact on many families’ financial circumstances. Child poverty rates shrank to record-low rates in 2021, according to the U.S Census Bureau. The rate more than doubled in 2022 — going from the record-low 5.2% to more than 12% — after pandemic-era relief, including the enhanced child tax credit, faded away, Census researchers found.
Given that “child poverty spiked dramatically,” in the Census Bureau’s last measure, “Congress needs to do something, and this is a meaningful change,” said Chuck Marr, vice president for federal tax policy, at the Center on Budget and Policy Priorities, referring to the proposed updates to the child tax credit.
There are approximately 19 million children living in households earning too little to get all of the current version of the tax credit, or any of it, according to the left-leaning think tank’s estimates. The proposal would reach about 16 million of those 19 million kids in the first year, they said.
The proposal would pull approximately 400,000 kids out of poverty this year and eventually keep 500,000 kids out of poverty in 2025, according the organization’s estimates.
Census researchers said the 2021 enhanced version of the child tax credit lifted 5.3 million people, including 2.9 million children, out of poverty.
Children and families will be better off if lawmakers can pass the proposal, which latches child tax credit changes with tax rule changes for businesses, Wyden and Smith said in statements Tuesday.
The hope is to pass the proposal before tax season starts Jan. 29, Wyden noted.
Other proponents of the expanded 2021 version of the child tax credit, like Sen. Michael Bennet, a Democrat from Colorado, said he’s “grateful” Smith and Wyden are focused on child poverty but “disappointed” the result isn’t a redo of the 2021 credit.
“We need to get this done, and after we do, I’ll keep fighting to make the expanded Child Tax Credit permanent,” he said in statement.
Lawmakers have a lot on their plate, starting with efforts to avoid a partial government shutdown before midnight Friday.
Low-income families also have a lot on their minds at a time when consumer debts are mounting and many costs are weighing on wallets. Here’s a look at the proposal’s specifics:
How the rules would change for the child tax credit
Many of the changes related to the credit’s rules on refundability. If a credit has more to pay a household after it pays off liability, the excess becomes refund money.
For 2021 only, the child tax credit was fully refundable. Then it reverted to its current rules. For now, the credit’s refundable portion is $1,600.
The proposal increases the refundable portion to $1,800 for 2023 income taxes. It becomes $1,900 for 2024 income taxes, which are filed next year, and $2,000 for 2025 taxes.
The starting point to tap the credit is at least $2,500 in earned income. For 2021 only, lawmakers halted the earned income requirement. This is the work requirement many Republicans and conservatives were keen on keeping intact.
Now it’s back to the $2,500 threshold, phasing in 15 cents for every dollar of earned income over that amount, Marr said.
For now, the 15% phase-in applies no matter the number of children in the house, he noted.
The proposal counts the kids and boosts payouts for some people who can really use it, Marr said. A single mother earning $10,000 with two kids would have a $1,125 credit under current law. “This doubles that,” he said.
When people do their 2024 tax returns next year, or their 2025 returns the year after, the proposal would give them a two-year look back window to pick the earned income that best boosts the credit payout.
In other words, a 2024 tax return could rely on 2023 earned income amounts if its larger than 2024 earned income. That’s a win for families with incomes that swing higher and lower from year to year, said Adam Ruben, director of Economic Security Project Action, which has pushed for a permanent version of the 2021 child tax credit.
The proposal is “a critical first step in providing families with the tools to deal with rising costs and affordability challenges,” he said.
Another rule change would index the credit for inflation in 2024 and 2025. By 2025, the payout could go to $2,100, Marr said.
Can the updated child tax credit pass?
The proposal is an important first step, but emphasis on first step, some say.
“The road ahead is long and there are several election-year stumbling blocks that must still be cleared,” according to John Gimigliano, head of legislative and regulatory services and KPMG’s Washington National Tax practice.
Even if it passes, these are just near-term changes. Beyond that, the bigger picture is the coming end-of-2025 expiration for large portions of the tax code, including the rules and $2,000 payout for the child tax credit.
Wyden and Smith’s tax proposal also calls for a quicker end to the Employee Retention Tax Credit, another pandemic-era. That credit has been marred by improper use, the IRS has said. Its wind-down would save an estimated $70 billion, Smith and Wyden said.
Another hurdle is quickly turning any enacted law into real-life results for taxpayers. That’s especially true if passage happens just before the tax-filing season’s start or during it.
The tax deal negotiations have been going on for months.
Several days before the proposal’s release, IRS Commissioner Danny Werfel told reporters the agency could swiftly plug law changes into the tax code alongside filing season duties.
Generally, Werfel said, “based on precedents and prior years, the IRS has shown a resiliency and an ability to quickly turn around these types of packages.”
