The House’s recent passage of a bipartisan bill has the potential to benefit millions of families through changes to the federal child tax credit.
Low-income families, particularly those with multiple children, are expected to see the most significant assistance. According to the Urban-Brookings Tax Policy Center, a majority of families earning less than $21,000 annually would receive a tax cut under the new provisions.
Here’s what’s changing about the tax credit:
Currently, the tax credit provides a maximum benefit of up to $2,000 per child, with a portion of that amount being refundable.
Under the new bill, the refundable portion of the credit would gradually increase, reaching $1,800 for 2023 tax returns, $1,900 for the following year, and $2,000 for 2025 tax returns. Additionally, the bill adjusts the top-line credit amount to temporarily grow with inflation.
To be eligible for refundable child tax credit payments, households must have at least $2,500 in income.
Notably, the bill does not reinstate the monthly payments established in 2021 under the American Rescue Plan.
To qualify for the credit, children must have a valid Social Security number and meet other eligibility criteria outlined by the Internal Revenue Service.
How much would tax bills be reduced?
On average, households benefiting from the tax credit would see a tax cut of $680 in 2023, as per the Tax Policy Center’s estimates.
Approximately half of households earning less than $21,000 annually would experience a tax cut, along with nearly a quarter of households with incomes below $40,500 per year.
Interestingly, the bill would also benefit the top 1% of income earners, with households making over $980,000 seeing an after-tax income boost of 0.5% ($9,500) in 2023.
In comparison, households in the lowest income quintile (earning under $21,000 annually) would see after-tax gains averaging 0.3% ($60) in 2023.
Overall, just over 16% of Americans would have a lower tax bill due to the proposed changes.
What’s next in Congress?
Before the new tax provisions can take effect, the bill must pass through the Senate. However, its fate remains uncertain, with some Republican senators expressing reluctance to grant President Joe Biden a legislative victory ahead of the November elections.
Senate Republicans are particularly displeased about being excluded from negotiations between Senate Finance Committee Chair Ron Wyden (D-Ore.) and House Ways and Means Committee Chair Jason Smith (R-Mo.).
They argue that the bill would extend the child tax credit to tens of thousands of migrants being paroled into the country by the Biden administration.
If the bill successfully navigates these challenges, it has the potential to provide significant benefits to low-income Americans. Additionally, the bill aims to enhance a tax credit for the construction or rehabilitation of rental housing targeted at lower-income households, potentially adding an estimated 200,000 housing units nationwide.
