Understanding the Newly Expanded Child Tax Credit – What You Need to Know

As the United States struggles to deal with an increasingly expensive and uncertain future, policymakers are pondering whether to enhance the Child Tax Credit. If they do, it will help millions of parents recover their finances and better manage the rising cost of raising kids.

In 2021, the temporary credit enhancement helped lift 3.7 million children out of poverty. But it was a success that could only be made permanent with action by Congress.

Taxes

The child tax credit is a federal income tax benefit that reduces the amount of taxes you pay. It is one of the most significant investments the federal government makes in children and is a powerful policy tool to help end poverty and grow the middle class.

The newly expanded child tax credit comprises three parts: a work credit, a family credit, and a phase-out range.  few state tax systems also offer tax benefits for families with children.

EPI’s research shows that the child tax credit has a large positive effect on poverty and income levels, with nearly half of the individuals lifted out of poverty by the CTC and EITC being children.

As the credit has expanded recently, it has benefited most working families. The expansion, enacted in 2021 and set to expire after 2025, boosted average credits for all families with children by an estimated $4,380 per year.

Despite the expansion, most families still need to get the maximum credit they can under prior law. This is partly due to changes in the TCJA and the American Rescue Plan Act of 2021, which temporarily changed the income limits for claiming credit.

In Investing for America’s Economy, EPI proposed a plan to reform the credit that would simplify the tax code and promote upward mobility while helping to make it more socially equitable. The plan would retain the key provisions of the existing credit while reducing its effective marginal tax rates by up to 50 percent, increasing the “bang for the buck” for each dollar spent on the credit (Bivens et al. 2012b).

Payments

If you had a child or children during 2021 and earned less than $19,300 for single filings, $27,500 for heads of household, and $31,200 for joint filers, you are eligible for the expanded Child Tax Credit. This is up from the current limit of $2,000 per child under 17 and is fully refundable, meaning you won’t pay back any if your income goes up or down.

As part of the American Rescue Plan Act, Congress extended this benefit to cover an entire year, boosting it from $2,000 to a maximum of $3,600 for kids five or younger and $3,000 for children 6-17. It also gave families half of their credit ā€” $250 for kids aged 6-17 and $300 for kids under 6 ā€” as advance monthly payments from July through December 2021.

For many families, those payments were an extra income boost that allowed them to buy more food and gas, helping offset rising prices. That could help families whose primary income earners had to stay home with their kids because they couldn’t afford to hire child care or take advantage of affordable care facilities that would allow both parents to work.

The rollout of the child tax credit as a monthly payment was an experiment, but the data on its impact remains limited. It is essential to know the results of this program, as they will help inform future cash delivery efforts and potentially be used to disclose how much tax credit should be available for a given family.

Calculators

The child tax credit is a great way to save for your children and plan for their future. However, the new rules on the credit can be confusing.

Using a calculator is one way to figure out what you can expect. These are typically available online or at your local financial institution.

A tax calculator will allow you to see how much you’ll owe based on your filing status. In addition, the calculator will calculate your tax credit if you choose to claim it.

For example, if you’re filing as head of household with two eligible children, the credit will be 15% of your earned income.

The credit can help you pay for various expenses depending on your situation. You can use it to cover the cost of things like child care, a summer camp, or after-school activities.

Another benefit of a child tax credit is that it is refundable. This means the credit you receive can be added back to your taxes in the following year if you’ve already filed.

A few other factors affect the amount of the credit you get. For instance, the credit is phased out for families with income above $200,000 for single filers and $400,000 for joint filers.

Planning

The Child Tax Credit helps families with children pay for food, housing, and healthcare. But it can only be effective if policymakers ensure it is available to all families.

The President’s budget proposal aims to make the CTC permanent. It also includes other critical anti-poverty measures, such as allowing parents to claim a more significant tax break for their health insurance premiums, strengthening Medicare’s drug negotiations, and expanding Medicaid home and community-based services.

However, it is unlikely that lawmakers will agree to the drastic tax increases necessary for these policies to be fully implemented. Therefore, policymakers must give struggling families hope by boosting the CTC during this lame-duck session.

To make credit more useful to struggling families, ITEP recommends boosting the maximum amount of credit and expanding it to 17-year-olds. This would allow more New Jersey children to receive support and help ensure more families have enough income to qualify for the credit.

But before that happens, it’s essential to understand the basics of credit and how it works. For starters, the new maximum credit phases out at modified adjusted gross incomes of $75,000 for singles, $112,500 for heads of households, and $150,000 for married couples filing jointly.

It is critical to understand that the credit phases are based on income, not the number of children in a family. Millions of children under 17 are denied full credit or get a smaller amount because their families earn less. This design flaw costs us a substantial share of the poverty-fighting potential of the federal Child Tax Credit expansion under the Rescue Plan.

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