Child Tax

American parents could see significant benefits if a bipartisan bill announced on Tuesday becomes law.

The proposed legislation, totaling approximately $78 billion in tax cuts, aims to expand the child tax credit and offer tax credits for businesses. However, the bill faces a potentially challenging path to passage.

The announcement was made by Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee, and Rep. Jason Smith (R-Mo.), chairman of the House Ways and Means Committee, who lead the top tax policy committees.

Under the bill, the child tax credit would be expanded, and tax credits for businesses would also be included.

Despite the potential benefits, the bill’s passage may face obstacles given competing legislative priorities and political dynamics.

Benefitting from the proposed legislation, individuals stand to see improvements in the child tax credit.

Currently set at $2,000, only around 75% of that, or $1,600, is refundable at tax time.

Refundable tax credits are disbursed as cash once an individual’s tax bill reaches zero. Nonrefundable tax credits, on the other hand, can solely be used to offset tax debt, with any excess credit forfeited.

Under the proposed legislation, the child tax credit’s maximum refundable amount would increase. For 2023 tax returns, it would rise to $1,800, $1,900 for the subsequent year, and $2,000 for 2025 tax returns.

These adjustments aim to provide enhanced financial support to families and individuals, potentially easing the burden of childcare expenses.

To qualify for the child tax credit, the child must:

  • Be under 17 years old at the end of the tax year
  • Be a son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (e.g., grandchild, niece, or nephew)
  • Provide no more than half of their own financial support during the year
  • Have lived with you for more than half of the year
  • Be properly claimed as your dependent on your tax return
  • Not file a joint tax return with their spouse, or file it only to claim a refund of withheld income tax or estimated tax paid
  • Be a U.S. citizen, U.S. national, or U.S. resident alien

Additionally, there is an income cap for eligibility. Parents who earn more than $200,000 ($400,000 if filing jointly) won’t be eligible for the full 2023 Child Tax Credit but may receive a partial credit.

The proposed bill primarily aims to benefit low-income families. Sen. Wyden emphasized that approximately sixteen million kids from low-income families would see improvements under this plan.

During the COVID-19 pandemic, The American Rescue Plan increased the child tax credit from $2,000 to $3,000 for children over 6 years old and from $2,000 to $3,600 for children under 6. These enhanced benefits, credited with reducing child poverty in 2021, expired at the end of the year.

Besides parents, the proposed bill also benefits business owners. It allows companies of all sizes to immediately deduct research and development costs and fully deduct the purchase of equipment, machinery, and technology. Moreover, it provides more flexibility in deducting borrowing amounts.

Funding for the bill would come from accelerating the end of the COVID-era program that rewarded businesses with tax breaks for retaining employees.

Sen. Wyden aims to gain approval for the measure in time for businesses and families to benefit during the upcoming tax filing season. However, achieving this goal may be challenging as lawmakers are already focusing on other legislative priorities.

One option could be attaching the measure to one of those top-priority bills.

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