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The Child Tax Credit (CTC) is an essential financial support system for families throughout the U.S. It is intended to ease the burden of raising children, help lower child poverty, and enhance families' general well-being. With significant revisions proposed by the Tax Relief for American Families and Workers Act of 2024, the CTC will take center stage in 2024.
This bill, approved by the House of Representatives and awaiting Senate deliberation, has sparked debates and conversations among policymakers, families, and economic analysts alike. Families stand to gain from the possibility of increased benefits, which raises questions about the broader societal impact. This blog explores the latest updates, proposed modifications, and ongoing discussions surrounding the CTC in 2024, providing insight into what these potential developments might mean for eligible families.
A significant provision of the US tax system is the CTC. Families with qualifying children can receive financial assistance, depending on the child's age and the family's income. The credit, which fluctuates depending on the child, is intended to relieve some financial burdens families bear, enabling millions to live better lives and raise their children out of poverty.
To be eligible as a dependent child, he/she/they:
Age Limit: Must be under 17 years old at the end of the tax year.
Relationship: Must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them (for example, grandchild, niece, or nephew).
Support: Must not have contributed more than half of their support during the tax year.
Tax Return Filing: Must not have filed a joint return with a spouse (unless claiming a tax refund).
Dependency: Must be appropriately claimed as a dependent on the taxpayer's federal tax return.
Social Security Number: Must have a valid Social Security number for employment in the United States.
Residency: Must have lived with the taxpayer for more than half of the tax year in the United States.
Citizenship: The child must be a U.S. citizen, national, or resident alien.
Income: To qualify, a parent must have a minimum annual income of $2,500. The entire credit amount is available for those with modified adjusted gross income (MAGI) not exceeding $200,000 ($400,000 for joint filers). The benefit is reduced by $50 for every $1,000 earned above these thresholds.
Filing Status: The CTC is available to taxpayers who file as single, married filing jointly, head of household, or qualifying widow with a dependent child.
Earned Income Requirement: For the refundable portion of the CTC (also known as the Additional Child Tax Credit or ACTC), the taxpayer must have earned income (e.g., wages, salaries, tips, etc.)
The CTC directly lowers taxpayers’ total taxes owed on a dollar-for-dollar basis. You claim it when filing your federal income tax return (Form 1040) along with Schedule 8812 (Credits for Qualifying Children and Other Dependents) if claiming the refundable portion (ACTC). This means you can receive part of the credit even if you don't owe any taxes.
Until the Senate passes the 2024 proposed legislation, the maximum credit is $2,000 per qualifying child, with up to $1,600 being refundable, increasing to $1,700 in 2024. The refundable portion of the CTC phases is 15% for each dollar of income earned above $2,500.
The Expanded Child Tax Credit, bolstered to as much as $3,000 per child and $3,600 for children under 6 through emergency legislation connected to the COVID-19 pandemic, expired more than two years ago. Anti-poverty campaigners have pressed lawmakers and policymakers to strengthen the CTC program ever since its pandemic-era expansion, which demonstrably helped millions of children escape poverty, was pulled down/expired. This pressure has resulted in the proposed 2024 Child Tax Credit increase.
Here's an overview of the key proposed changes:
1. Gradual Increase in Refundable Limit: The credit amount remains $2,000 per child, but the refundable portion increases to $1,800 in 2023, $1,900 in 2024, and finally $2,000 in 2025.
2. Inflation Adjustment for 2025: This adjustment aims to keep pace with inflation and maintain the credit's value. For example, if inflation is 5% for a tax year, the CTC would be adjusted upward by $100.
3. Quickened Phase-in for Multiple Children: To further support families with multiple children, the bill proposes to quicken the phase-in rate. For instance, a family with four children would see their phase-in rate rise from 15% to 60%, allowing them to reap the credit's benefits more rapidly.
4. Election to Use Prior-Year Earned Income: The bill recognizes income fluctuations for many families and allows taxpayers to use their current or prior-year income to calculate their maximum CTC. This flexibility ensures families receive the most advantageous credit possible, even with income variations.
5. Temporary adjustments: These proposed CTC adjustments are temporary and would only last until the end of 2025 unless extended by further legislation. However, it's important to note that temporary tax benefits are often continued through subsequent laws.
These changes represent an attempt to improve family financial support via the tax code while recognizing the critical role that the CTC plays in promoting both the economic stability of families and the well-being of children.
Reduced Tax Liability: The CTC directly lowers the amount of taxes owed. If the credit amount exceeds the taxes owed, families can receive a refund.
Fully or Partially Refundable: Part of the CTC (ACTC) is refundable, allowing families to receive a refund even if they owe no tax.
Increased Disposable Income: By reducing tax liability or providing refunds, the CTC increases disposable income for families, which may be used for essential child-rearing expenses like food, clothing, and education.
Reduced Child Poverty: The CTC has been instrumental in reducing child poverty by providing additional income to families most in need.
Flexibility in Use: There are no restrictions on how families can use the CTC, offering them flexibility to address their most pressing needs.
Incremental Benefit: The credit amount typically increases with the number of qualifying children, providing more support to larger families.
Wide Range of Eligible Families: The CTC is eligible for diverse families, including many middle- and low-income families, making it a widely accessible form of financial support.
The proposed changes to the Child Tax Credit (CTC) could significantly impact eligible families, especially low- and middle-income families, potentially increasing financial support through higher credit amounts and adjusted income limits and enhancing their financial stability. By expanding eligibility and increasing the refundable portion of the credit, the modifications could reduce child poverty and support economic recovery. The exact impact would depend on the final details of the legislation and its implementation.
Government Cost: Critics argue that the expanded CTC significantly increases federal spending.
Disincentive to Work: Concerns exist that it could discourage some recipients from working.
Limited Scope: Some progressives believe the expansion doesn't go far enough to support low-income Americans.
Political Motive: Some view expansion as a political tactic to secure votes rather than a purely social welfare measure.
US Internal Revenue Service (IRS) Commissioner Danny Werfel assured House Ways and Means Committee members at a February 15, 2024, hearing of its ability to handle changes to the CTC when implemented by the new tax relief package. IRS is trying to ensure taxpayers can fully benefit from the revised credit provisions by honing its preparedness and approach to adapting these changes efficiently, aiming to ease the transition for taxpayers and enhance their access to the benefits. Werfel added, “We urge and encourage taxpayers to file when they’re ready; don’t wait on Congress.”
The CTC is one of the core foundations of the U.S. government's efforts to support families with children. Given its significant impact, policymakers, advocates, and families closely watch any changes or proposed enhancements to the CTC.
As of April 2024, the Child Tax Credit (CTC) operates under the 2023 tax code framework, awaiting potential Senate-approved changes. These proposed updates for 2024 and 2025 could significantly impact eligibility, amounts, and benefits for families, aiming to increase support and reduce child poverty. Given the dynamic nature of tax legislation, staying informed through reliable sources is crucial for maximizing potential benefits and navigating changes effectively. Keep an eye on legislative developments for any updates to the CTC.
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The Authors, Allen Smith is a Practicing Certified public accountant and senior vice president at myCPE – Continuing Education Platform for Professionals. He understands the current needs of the education domain and strategies for the presenters to adapt the new changes.
Jason Dinesen
Imtiaz Munshi, CPA
