Tax season always seems to start with some kind of weird, what-if element.
This year's “what ifs” include the possibility of expanding the child tax credit, possibly making it retroactive to 2023. We're not talking about a return to prepaid monthly payments or the return of the generous benefits that many families have seen. Pandemic.
But if Congress approves the package, families who need it most will receive even more help through credits. The goal, according to the Center on Budget and Policy Priorities, is to provide more money to households that receive some credit or none at all because their incomes are too low to be penalized by the current credit formula. It is said that it is to provide.
How would the proposed child tax credit work?
The think tank cites the example of a parent with a toddler and a second-grader who earns $15,000 a year as a food server.In the first year under the new rules, families You will receive $3,600 in child tax credits. This is an additional $1,725 over what the example parent would receive under the current rules.
“There's real money involved,” said Chuck Ma, vice president for federal tax policy at the Center on Budget and Policy Priorities.
The 2023 changes focus on providing more funding and increasing access to the Child Tax Credit for low-income families. Marr said the changes address a complex formula that currently prevents many low-income families with two or more children from receiving large credits.
The center said in its report that under current law, many low-income families with two or three children receive about the same total loan amount as families with one child at the same income level. He pointed out that
The child tax credit basically gives some high-income earners more benefits than low-income earners.
But taxpayers need to realize that we are not talking about fundamental changes heading into 2023 that will help many high-income households.
For example, someone who earns $150,000 a year and receives the child tax credit will not see any increase in their income in 2023. However, there may be an inflation adjustment, so this group could receive a little more money when they file their 2024 and 2025 returns.
Under the plan for the American Families and Workers Tax Relief Act of 2024, the overall maximum child tax credit would be adjusted for inflation, benefiting everyone who receives the credit.
Don't get me wrong: It's unclear if or when tax legislation, including the child tax credit expansion, will pass Congress. Optimistically, the child tax credit revision language had strong bipartisan support when it was approved by the House and Senate tax committees.
The key word is “hope” and many are hopeful that the bill could pass Congress near Jan. 29, when the Internal Revenue Service begins accepting and processing federal income tax returns. . But we may end up talking about things in the weeks ahead.
Some taxpayers may want to hold off on filing early until their child tax credit situation is resolved, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting in Riverwoods, Illinois. It suggests that. But that strategy won't work for everyone on a tight budget.
“The language of the bill would make the changes retroactive to your 2023 tax return,” Luscombe said.
Luscombe and others have warned that the tax law could be stalled by congressional negotiations over other issues, including border security, aid to Israel and increased military aid to Ukraine. We don't know if the rules for the child tax credit will change.
more:Three big changes coming to your 2023 Michigan income tax return, including some extra checks.
Why some taxpayers file as early as possible
People living on a tight budget often aim to file their tax returns in late January or February to receive their federal income tax refund as soon as possible. However, delays in tax changes could cause further disruption.
Many are hopeful that retroactive changes to the law in 2023 would allow the IRS to issue additional funds in the future to be paid to low-income households that filed earlier this year. Additional payment if you apply early.
The deadline to file both federal and Michigan returns for 2023 is April 15th.
Matt Heatherwick, chief program officer at the nonprofit Fiscal Assistance Association in Detroit, said the biggest challenge will be how changes related to the child tax credit will affect taxpayers if the bill passes Congress and becomes law. He said that taxpayers would need to understand what this means.
“The ultimate goal is to ensure that eligible taxpayers receive the amount of tax credit intended by the tax law change,” Heatherwick said.
Heatherwick emphasized that IRS officials said changes near the start of the season are nothing new. Although the deadline is tight, adjustments could be made, he said.
For example, in 2021, important but temporary changes were made to the tax rules related to unemployment benefits for 2020 federal income tax filers. This change exempted some unemployment income received in 2020 from federal income taxes for many people.
Heatherwick said at the time that the IRS moved quickly to update tax forms to reflect the changes regarding unemployment benefits. The IRS then developed a plan to amend the tax returns of people who had already filed their 2020 returns to include the full amount of their unemployment income as taxable.
Congress did not renew this 2020 tax cut. All unemployment benefits received in 2023 It is reported as taxable income on your federal income tax return.
Who won't see a change to the child tax credit in 2023?
When it comes to child tax credit changes, some households will benefit more than others on their 2023 returns.
Families with children 16 and under who already received the full $2,000 child tax credit and are eligible for the full credit on their 2023 return will see no changes when they file their 2023 return. You won't receive any benefits. Currently, the full credit is available to the following families: Annual income less than $200,000 or $400,000 for couples filing a joint return. Parents or guardians with higher incomes may be able to claim a partial credit.used by taxpayers Schedule 8812 Calculate credits.
The child must live with you for at least 6 months of the year. The child must be under the age of 17 as of the end of 2023.
More importantly now, the plan calls for providing financial support to families who receive so-called “refundable” credits. Currently, a refundable credit of up to $1,600 is available in the Child Tax Credit for low-income families who do not owe federal income taxes. You must file a tax return anyway to claim the credit.
Under the current proposal, the refund would be up to $1,800 in 2023 taxes. It will rise to a maximum of $1,900 in 2024 and $2,000 in 2025.
More importantly, based on new calculations, access to this credit will be expanded to more children, with more low-income families with two or more children receiving more money under this credit. That means you are eligible to receive it.
Families cannot receive a credit based on their first $2,500 of income. Then, once her earnings reach $2,501, the credit begins phasing in at just 15 cents on the dollar.
Luscombe noted that the proposed changes would increase the income calculation from 15% of household income with income over $2,500 per household to 15% of household income with income over $2,500 times the number of children. This shift will increase the amount of money available through credit for large families.
People who earn just over $13,000 a year are now at the $1,600 refundable level, said Marr of the Center on Budget and Policy Priorities. But the current complex formula requires parents to reach that threshold in income before they can qualify for more money for a second or third child.
For example, a household with an income of $12,500, whether it has one or two children, would qualify for the $1,500 child tax credit, the center said.
“For really low-income people, that really hurts,” Marr said.
The current system is what Marr calls “sequential,” meaning that you first need to build up an income to reach a predetermined monetary threshold to support your first child. Mr Marr said if the proposal becomes law, the new formula would more quickly account for the number of children in the calculations. He said this is an important change because the majority of children in the country live in households with two or more children.
Every parent knows that it costs much more to raise two or three children than it costs to raise one child. This is true no matter how much money you make, but it's especially true if you're living on a very limited income.
How many children could benefit in Michigan?
In Michigan, about 474,000 children from low-income households would benefit in the first year of the proposed loan expansion, according to data from the Center on Budget and Policy Priorities.
Nationally, the Center's project on budget and policy priorities proposes changes to the credit that would bring benefits such as: 16 million In the first year of credit expansion, children, more than one in five of the nation's 72 million children. Under the latest plan, the credit expansion will be in effect for three years.
The center said half of the roughly 16 million children nationwide who would benefit from the proposal in the first year live in families that would receive more than $630 in benefits through the loan expansion.
Some families could get more than $1,000. With a small group, he would earn more than $1,400 in the first year.
The expansion would particularly help Black, Latino, American Indian and Alaska Native children, according to the Center on Budget and Policy Priorities. Their parents are overrepresented in low-wage jobs due to historical and ongoing discrimination and other barriers.
Another important change included in the package is that the bill would allow taxpayers to take advantage of a “look back” provision and use earned income from previous tax years to calculate deductions in 2024 and 2025. You will be able to choose. This can be done if the taxpayer's earned income in the current year is less than the earned income in the previous year. This change will allow you to get more money if you lose your job or don't have enough hours to work.
“Low-income people face a very precarious labor market,” Ma said.
The child tax credit is a dramatic and generous change that many households have experienced during the pandemic, with credits worth up to $3,600 per eligible child under age 5 on their 2021 federal income tax return. I haven't paid attention to it. Up to $3,000 for children ages 6 to her 17 years.
But the proposed increases could help many households cope with the price increases left after the inflation spike. This is one of those “what if” moments that often comes during tax season.
Contact personal finance columnist Susan Tompol: stompor@freepress.com. Follow her on Twitter @Tonpol.
