President Biden has released his 2024 fiscal year budget for the government. As expected, he is proposing lots of tax hikes on upper-income individuals and corporations (including a "billionaire tax" and a near doubling of the capital gains tax rate). But Biden is also calling for bigger tax credits for families, including reinstating the 2021 expansions to the popular child tax credit, which are now gone. The enhancements that Congress made to the child tax credit in 2021 were temporary. As a result, the monthly child tax credit payments, the higher child credit amount, letting 17-year-olds qualify, and full refundability, all expired on December 31, 2021.
Democratic lawmakers had hoped to get the 2021 expansions extended through 2022 and beyond, touting the impact that a higher and fully refundable child tax credit with advance monthly payments would continue to have on reducing child poverty in the United States. But they were unable to make a deal with Congressional Republicans before Congress adjourned last year. So starting in 2022, the rules for taking the child tax credit reverted to those that were in place for 2020.
How much is the child tax credit now?
Presently, the child tax credit is worth $2,000 per kid under the age of 17 whom you claim as a dependent on your tax return. To qualify, the child must be related to you and generally live with you for at least six months during the year. The child also must be a citizen, national or resident of the United States and have a Social Security number.
The credit begins to phase out if your modified adjusted gross income (modified AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return. Once you reach the $400,000 or $200,000 modified AGI threshold, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold amount. Up to $1,500 of the credit is refundable for some lower-income individuals, but to get that partial refund, those individuals must also report on their 1040 forms at least $2,500 of earned income.
Biden’s child tax credit plan
President Biden wants to expand the child tax credit by restoring the following 2021 expansions:
- allow 17-year-old children to qualify for the child tax credit;
- increase the child tax credit to $3,000 per child ($3,600 per child under age 6) for many families;
- make the credit fully refundable, meaning people who qualify for the credit can receive the full amount as a refund, even if they have no tax liability; and
- not require parents to be employed, or otherwise have earned income to claim the fully refundable credit.
Also, under Biden's child credit proposal, taxpayers eligible for the child tax credit could opt to have 100% of the credit paid in advance by having the IRS send them monthly payments through electronic fund transfers. The monthly payments of up to $250 per child ($300 per child under age 6) would not be taxable, but taxpayers would have to reconcile on their federal tax returns any payments received with the child credit they are entitled to.
As was the case in 2021, not all eligible families with children under age 18 would get the higher child credit. The enhanced tax break would begin to phase out at modified AGIs of $75,000 on single returns, $112,500 on head-of-household returns and $150,000 on joint returns, with a modified rule for large families.
Note: Under President Biden's proposal, families who aren’t eligible for the $3,000 or $3,600 credit, but who have modified AGIs at or below $400,000 on joint returns or $200,000 on other returns, would still be able to claim the regular credit of $2,000 per child on their federal income tax returns, less any advance payments that they get. Families with modified AGIs above the $400,000/$200,000 thresholds would see the $2,000 per-child credit reduced in the same manner as under current law.
Romney's child tax credit proposal
Republican Sen. Mitt Romney of Utah has also called for a higher child tax credit but his plan comes with twists.
Romney's plan, i.e., the Family Security Act 2.0, would increase the credit to $3,000 per child ($4,200 for each child under age 6) and would allow 17-year-olds to qualify. Romney wants the credit to be paid in advance by having the Social Security Administration, not the IRS, send monthly payments to families of $250 per child ($350 per child under age 6). Expectant parents can begin to receive advance payments four months prior to an unborn fetus’s due date.
Under Romney's proposal, the child tax credit would begin to phase out at modified AGIs over $400,000 on joint returns and $200,000 on single returns. And the credit would only be available to working parents. A family would need to have $10,000 or more in earned income to receive the full benefit of Romney's proposed child credit, with families earning less than $10,000 receiving a benefit proportionate to their earnings.
Now here’s another rub. Romney wants to pay for his proposal by eliminating three popular tax breaks that many families rely on.
- First, Romney's plan would get rid of the head-of-household filing status so that a single parent with children would have to file a single return with less favorable tax brackets.
- Second, under Romney's proposal, parents of children under age 13 would no longer get a tax credit for a portion of the childcare costs that they pay. Presently, the child and dependent care credit is worth 20% to 35% of up to $3,000 in eligible childcare expenses, depending on your income…$6,000 if you have two or more children needing care.
- Third, Romney’s plan would put an end to the state and local tax deduction, which Romney calls an inefficient tax break to upper-income taxpayers. Currently, individuals who itemize on Schedule A of the Form 1040 can deduct up to $10,000 of the state and local income tax (or sales tax) and residential property taxes that they pay. Romney would also reform the earned income tax credit available to low-income taxpayers.
Rubio’s child tax credit proposal
Republican Sen. Marco Rubio of Florida has a "Providing for Life Act" that includes a proposal to increase the child tax credit to $3,500 per child ages 6 through 17 ($4,500 per child under age 6). And Rubio would extend the credit to expectant parents. The credit would begin to phase out at modified AGIs over $400,000 on joint returns and $200,000 on other returns.
Rubio's plan would allow partial refundability of the credit for taxpayers with earned income. But unlike Biden and Romney’s plans, the Florida senator would not have the child tax credit paid in advance through monthly payments.
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Will the child tax credit be expanded?
With the divided political climate in Washington, D.C., gridlock is expected to be the norm for this year and in 2024. Look for lots of talk on taxes, but not much action, as no party will get much on its tax wish list.
But that doesn’t mean that nothing will happen. Some changes are possible, perhaps even a combination of restored tax breaks for businesses and a bigger child tax credit for families. Ultimately, whether the parties can reach a deal will depend on how much each side is willing to compromise.
