Tax season often brings unexpected twists, and this year is no exception. The current buzz surrounds potential changes to the child tax credit, which, if approved by Congress, would likely be retroactive to 2023. However, this isn’t a return to the monthly advance payments or the more generous benefits seen during the pandemic. Instead, the focus is on aiding families with lower incomes who receive partial or no credit due to the existing formula working against them, according to the Center on Budget and Policy Priorities.
The proposed changes aim to provide more financial assistance and broader access to the child tax credit for lower-income families. The adjustments address a complex formula that currently prevents many low-income families with two or more children from receiving a larger credit. The Tax Relief for American Families and Workers Act of 2024, yet to be passed by Congress, intends to adjust the maximum overall child tax credit for inflation and increase it from $2,000 in 2023.
Under the current system, the center notes, many low-income families with two or three children receive roughly the same total credit as a family with one child at the same earnings level. The child tax credit, in essence, tends to benefit higher-income individuals more than their lower-income counterparts.
However, it’s essential to recognize that the proposed changes for 2023 won’t significantly impact families with higher incomes. Individuals earning $150,000 per year, for instance, wouldn’t see a boost on their 2023 return. Any potential increase for this group might occur when filing 2024 and 2025 returns, thanks to inflation adjustments.
The Tax Relief for American Families and Workers Act of 2024 suggests adjusting the maximum overall child tax credit for inflation, benefiting all credit recipients. The uncertainty lies in whether and when Congress will pass tax legislation that includes an expanded child tax credit. Optimistically, the revised child tax credit language had bipartisan support in both the House and Senate tax writing committees.
While some recommend holding off on filing early returns until the child tax credit situation is resolved, it may not be a feasible strategy for everyone with tight budgets. The bill’s language proposes retroactive changes to 2023 tax returns, potentially causing delays in tax filers receiving any extra money owed to them. Congressional negotiations on other matters could further complicate the timeline.
For many living on tight budgets, filing tax returns early in the year is a way to secure a federal income tax refund quickly. Late changes to tax rules, however, may introduce confusion. If the law changes retroactively for 2023, the IRS is expected to issue any additional owed funds to lower-income families who filed early, albeit after some waiting.
The deadline for filing both federal and Michigan 2023 tax returns is April 15. Matt Hetherwick, Chief Program Officer for the Accounting Aid Society in Detroit, anticipates challenges in helping tax filers understand the potential changes to the child tax credit. The IRS has emphasized that changes close to the start of the tax season are not uncommon, and adjustments are possible, even with a tight time frame.
In Michigan, around 474,000 children in lower-income families could benefit in the first year if the proposed expanded credit is implemented. Nationwide, the Center on Budget and Policy Priorities estimates that the changes would boost benefits for approximately 16 million children, over 20% of the nation’s child population, in the first year of the credit expansion. The three-year expansion aims to help families, especially those with two or more children, receive more significant credits.
The proposed changes not only increase the refundable amount for low-income families but also expand access to the credit for more children based on a new calculation. Families with children, particularly those with two or more, could qualify for more substantial credits under the revised formula.
The child tax credit changes aren’t as dramatic as the pandemic-era benefits, but they could assist families facing the aftermath of inflation. It’s a situation that requires monitoring during this tax season, as the potential impacts remain uncertain.