Approximately 90 percent of the proposed child tax credit changes are aimed at expanding how much the lowest-income families can receive.

On Tuesday, leaders from congressional tax committees announced a deal to expand the CHILD TAX CREDIT and extend some business tax credits. While passage isn’t guaranteed, advocates against poverty see the deal as an important step toward addressing issues with the tax credit. The CTC, designed to bolster families’ economic security, has excluded many of the poorest children. The proposed changes aim to rectify these shortcomings.

The proposed changes are set to happen over two years after the expanded Child Tax Credit expired. This expansion increased the benefit to as much as $3,600 per child and distributed half of the tax benefit through six monthly checks in 2021. It was widely praised for helping millions of children escape poverty and supporting parents who typically used the extra money for preschool, clothing, and other child-related costs.

Despite its popularity, the expanded tax credit came to an end in 2021. In 2022, the benefit reverted to its earlier limit of $2,000 per child, impacting many low-income families negatively, according to experts. Now, there are discussions about making improvements to the Child Tax Credit again.

Key Points about Proposed Changes to the Child Tax Credit:

What is the issue with the original Child tax credit?

Here are a few points related to discussions around the Child Tax Credit:

Refundability: One aspect of the Child Tax Credit is its refundability. Prior to legislative changes, the credit was partially refundable, meaning that families with low or no tax liability could receive only a limited refund. The refundable portion was increased through legislative changes to provide more support to low-income families, but there were debates about the optimal level of refundability.

Income Eligibility: Another issue revolves around the income eligibility criteria for the Child Tax Credit. Policy discussions often center on determining the income thresholds for eligibility and the phase-out ranges. Critics argue that the credit should be more targeted toward families with lower incomes to better address child poverty.

Legislative Changes: The Child Tax Credit underwent significant changes as part of the American Rescue Plan Act (ARPA) in 2021, including an increase in the credit amount, the expansion of eligibility to include 17-year-olds, and an increase in the refundability of the credit. These changes were implemented on a temporary basis and were set to expire after a certain period.

What is the current child tax credit?

In 2021, modifications were made to the Child Tax Credit, increasing it to $3,600 per child and extending its benefits to families not typically filing taxes, resulting in a significant drop in the child poverty rate. However, these changes were temporary, and in 2022, the credit reverted to its original amount of $2,000 per child. Consequently, the child poverty rate rose to 12.4%. Despite efforts to make the increased credit permanent, it remains a subject of ongoing debate regarding how best to support families and reduce child poverty.”

What is being proposed now?

Republicans have introduced a new plan to adjust the Child Tax Credit (CTC) to assist families with lower incomes. Here are the key points:

Increased Support for Low-Income Families: The proposal suggests raising the amount of money low-income families can receive. Instead of the previous limit of $1,600, it would gradually increase over the next three years, reaching around $2,000 in 2025.

For 2023 taxes, eligible low-income families would receive $1,800.
In 2024, the amount increases to $1,900.
By 2025, it would reach $2,000, with an additional $100 to account for inflation.
These changes are proposed to remain in effect until 2025 unless Congress decides otherwise.

Equitable Credit for Families with More Children: The plan aims to correct a rule that resulted in families with multiple children receiving the same credit as families with only one child. Under the proposed adjustment, families with more children would receive a higher credit, aligning with the current system for families with middle and higher incomes.

Refundability and Income Threshold: While the new credit isn’t fully refundable, it seeks to aid families earning less than $2,500. Despite Democratic proposals for full refundability, Republicans are concerned about potential work disincentives and maintain the $2,500 income threshold.

Flexible Eligibility Calculation: Starting in 2024, families can choose to calculate their eligibility using either their current income or their income from the previous year. This flexibility helps families facing sudden income changes, allowing them to use a more favorable year for eligibility calculations.

For instance, if a parent earned more than $2,500 in 2023 but experienced job loss in 2024, they could use their 2023 income when filing taxes in 2024.
This adjustment aims to assist the poorest families, particularly those of color, in cases of abrupt job changes or leaving work for caregiving responsibilities.