Is the amount of the Child Tax Credit going up for tax year 2023?
This question has been all over social media recently, as people get excited about a potential increase in the Child Tax Credit, which would increase the amount of the tax refund itself for many (not all!) clients who have child dependents.
While we certainly understand and respect the excitement, we also believe it’s not especially fun to get excited about something that later turns out to not be real.
With that in mind, this blog post should help tax professionals separate fact from fiction when it comes to these Child Tax Credit increases that so many clients and potential clients are excited about, but maybe they’re not real.
Please note that we have posted this article on February 2, 2024. The bill that contains the *proposed* Child Tax Credit increases has not passed into actual law. It is still being debated in Congress (in the Senate).
Changes could be made to this bill before it passes, or it could not pass at all.
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Without further ado, let’s address a few big questions about these *proposed* new Child Tax Credit increases for tax year 2023:
Is the amount of the Child Tax Credit increasing for tax year 2023?
This is a trickier question than it may seem at first since it depends how you define “the amount of the Child Tax Credit.”
Some people–for example, tax professionals–define the amount of the Child Tax Credit as the amount the IRS grants for each child before any “limits” are applied to a particular client’s Child Tax Credit amount.
Members of the general public, by contrast, may define “the amount of the Child Tax Credit as “the amount of credit that I actually see on my tax return.” If you have had “limits” applied to your credit amount, your Child Tax Credit amount is different than the amount the IRS uses–correct?
Since we mainly serve tax professionals, please allow us to answer this question as follows:
No, the amount of the Child Tax Credit is not going up for tax year 2023 in this proposed bill (which hasn’t passed, and could change).
The amount of the Child Tax Credit stays at $2,000 for tax year 2023 even if this new bill passes.
But some clients would get more Child Tax Credit if this new bill passes, correct?
Correct. That is why people on social media are so excited about it. And that is because this new bill proposes to, in summary, “loosen” the “limits” applied to the Child Tax Credit.
Whose Child Tax Credit would increase, then, if this new bill passes?
Clients whose Child Tax Credit amounts are currently being limited could (and often would) see an increase in Child Tax Credit for tax year 2023 if this new bill passes.
This will mainly apply to lower and middle income clients whose Child Tax Credit is being reduced (or eliminated) by the “refundability limits” that currently apply to the Child Tax Credit.
These “refundability limits” often block taxpayers from receiving the full $2,000 credit. So, if and when the new bill passes and those refundability limits are loosened, Child Tax Credits would go up for clients whose full $2,000 Child Tax Credit gets “unlocked” by the loosening of the limits.
If you’re a tax professional, you likely already know how the current refundability limits on CTC work (or can look in your tax software and see the calculations, your tax software should give you a worksheet).
If you’re a member of the general public, how much time do you have to listen to my explanation? Probably not as much time as it’s gonna take me to explain every aspect, but let’s do what we can in the time we have together! 🙂
How do the actual Child Tax Credit calculations work, under the proposed new bill?
Warning: simplification ahead, doesn’t cover all “edge cases,” I know.
Currently, the maximum refundable portion of the Child Tax Credit is calculated as follows:
(Client’s Earned Income – $2,500) x 0.15 = Maximum Refundable Amount of Child Tax Credit (but this amount may not exceed $1,600 per qualifying child)
Quick example for Head of Household filing status client with $7,500 earned income and two child dependents who qualify for Child Tax Credit (under age 17, lived with client required time of year, etc.):
($7,500 – $2,500) x 0.15 = $750 Maximum Refundable Amount of Child Tax Credit
In other words, this client won’t receive the “IRS Version” amount of the credit, which would be $2,000 per child, so should be $4,000 total, if the “IRS Version” of the credit applied.
But it doesn’t. Because this client will receive the “refundability limited” version of the credit. Thus, the total Child Tax Credit, for both kids, is $750.
Under this proposed bill, we (tax professionals) would be allowed to multiply the “Maximum Refundable Amount of Child Tax Credit” shown above by the number of qualifying children.
Also, the new bill replaces the “may not exceed” parenthetical notation to be –> (but this amount may not exceed $1,800 per qualifying child).
In the example above, then, we take $750 and double it, since we have two qualifying children–and then we “check” and make sure that the amount per child is not more than $1,800 per child, and we determine it is not.
Meaning this client’s Child Tax Credit would go up from $750 to $1,500, and this client’s tax refund would go up by $750 under this new bill (that hasn’t passed, might not pass, and could change before it gets passed).
What about Child Tax Credit increases for 2024, 2025, etc.?
Yes, there are further “enhancements” to the Child Tax Credit proposed for future tax years.
Since the purpose of this blog post is to address the immediate need of tax professionals to know what the heck is going for the tax returns we are currently preparing (tax year 2023), please allow me to pass for now on describing the Child Tax Credit changes that would apply to future years.
Don’t believe me, or just want more information on this topic? Read the bill, or the summary of the bill, for yourself.
Here is a link to the Congressional summary of the bill we’re talking about here, in case you want to read it for yourself: https://gop-waysandmeans.house.gov/wp-content/uploads/2024/01/The-Tax-Relief-for-American-Families-and-Workers-Act-of-2024-Technical-Summary.pdf
Let me know if I got anything wrong? 🙂
And remember, this new bill has not passed yet, might not pass, and could change further before it passes.
Please stay tuned for further developments, which, in Tax World, are always sure to occur.
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