The child tax credit may expand. Here’s what it means for you.
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The House of Representatives voted Wednesday to approve a roughly $80 billion deal to expand the federal child tax credit that would make the program more generous, primarily for low-income parents, as soon as this year.
The bipartisan agreement was reached by Senate Finance Committee Chairman Ron Wyden (D-Ore.) and House Ways and Means Committee Chairman Jason T. Smith (R-Mo.), who worked for months to finalize a deal. The bill’s path to passage in the Senate remains uncertain, but it could give President Biden a partial victory on one of his top domestic economic policy priorities: bringing back something like the expanded child tax credit, a centerpiece of his 2021 American Rescue Plan.
“This is a win for millions of small businesses, a win for millions of working families, a win for America,” Smith said during debate on the House floor on Wednesday.
The deal would make the existing child tax credit more generous. In exchange, it would also continue several business tax breaks favored by corporate America. The deal emerged in part because of substantial bipartisan support for both provisions across both parties. Republicans initially expanded the credit in 2017 tax cut legislation, and even some liberal economists favor the business provisions.
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How much would the child tax credit be?
Currently, the child tax credit gives most parents $2,000 per child. For the majority of recipients, that would not change under the new agreement for either this year’s taxes or next year’s. The deal would index the child tax credit to inflation for the first time, so most parents would benefit from a boost of about $100 on their tax returns in 2025.
In 2021, Biden’s stimulus plan increased the credit from $2,000 per child to $3,000 per child (or $3,600 per child under the age of 6). After that change expired at the end of 2021, however, the credit reverted to $2,000.
The biggest change in the deal is that it would make the credit more generous for families that currently earn too little to claim it in full.
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Who’s eligible for the new child tax credit?
Taxpayers who are currently eligible for the current tax credit would continue to be eligible. The changes appear most beneficial to low-income parents with multiple children.
Currently, only middle- and upper-income families receive the full $2,000 credit per child. That is because the credit reduces taxes owed and is not fully refundable, meaning many low-income families who don’t earn enough to owe more than the credit is worth can’t take full advantage of it.
But under the agreement announced Tuesday, poor families would be newly eligible to receive the tax credit for every child - even if they do not qualify for the full $2,000 per kid.
For example, a single mother with three kids earning $10,000 annually currently only qualifies for $1,250 in child tax credit benefits. A single mother with three kids earning $150,000 annually receives $6,000, or $2,000 per child.
Under the emerging deal, the single mother earning $150,000 would get the same credit, $6,000. But the benefit for the mother earning $10,000 would triple - from $1,250 for three kids to $3,750 for three kids.
Families with two kids are unlikely to benefit unless they earn less than roughly $40,000 per year, while families with three kids are unlikely to benefit unless they earn less than roughly $70,000 per year, according to Matt Bruenig, founder of the People’s Policy Project, a think tank that advocates a more generous credit.
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Who is not eligible for the new child tax credit?
Families that already receive the full $2,000 credit per child would see no change in their eligibility, though their credits would increase with inflation adjustments in 2025.
The expanded credit would continue to exclude many of the very poorest families. Families currently have to earn at least $2,500 per year to qualify even in part for the child tax credit. Roughly 10 percent of people are below that threshold, according to the People’s Policy Project.
The deal could help some people in this category, with a new provision that would allow parents to pick either the current year or the prior year to determine their eligibility. That means families who earn too little to benefit could still qualify if they earned enough the year before to do so. That is particularly important for poor Americans, who have unusually volatile incomes from year to year.
Democrats have pushed to extend the benefit in full to the poorest households, but Republicans have rejected that proposal as likely to discourage parents from seeking employment.
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When would the new child tax credit start?
Lawmakers are hoping to pass the tax package so the new benefit can take effect in time for the upcoming tax filing season. If a deal is not approved in the next several weeks, however, the Internal Revenue Service may not have time to implement the new benefits, potentially leaving lawmakers to try instead for next year’s.
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Will Congress pass this version of the bill?
It is unclear whether Congress will approve the agreement, despite the bipartisan support in the House. Senate Republicans were souring on it already: Sen. Chuck Grassley (R-Iowa) criticized the measure, which nonpartisan estimates say could lift 400,000 children out of poverty, saying it could help Biden’s reelection campaign.
“I think passing a tax bill that makes the president look good - may allow checks before the election - means that he can be reelected and then we won’t extend the 2017 tax cuts,” Grassley said.
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What else is in the bill?
The agreement also includes three key tax changes that aim to encourage business investment. Under the deal, Congress would make it easier for firms to claim tax deductions on interest expenses, research and development expenses, and investments in equipment. Republicans in 2017 restricted these investment credits to keep the overall cost down of their tax law, since corporations already received a significant tax cut as part of that legislation. But many Democrats support these policies as well, seeing them as important for some of Biden’s economic goals, like unleashing a boom in the clean energy sector.
The deal between Wyden and Smith also includes an expansion of a tax credit aimed at encouraging the construction of low-income housing, while also promoting economic ties between the U.S. and Taiwan.
The legislation is paid for at least in part by ending the Employee Retention Tax Credit Program, which was started during covid to encourage businesses to maintain their payrolls but has faced significant criticism.
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