Lawmakers have put forth a bipartisan proposal with the goal of significantly reducing child poverty. The proposed legislation, called the Tax Relief for American Families and Workers Act of 2024, incorporates tax breaks for poor and working-class families along with certain business tax breaks supported by the Republican party. It should be noted that this proposal is separate from the recent spending deal announced to avoid a government shutdown.
One of the main components of this proposal is an expansion of the child tax credits. A tax credit directly reduces the amount of tax owed by the taxpayer, dollar for dollar. Additionally, if the credit is refundable, any excess amount beyond what is owed can be refunded to the taxpayer. Currently, the maximum child tax credit is $2,000 per qualifying child, and for 2023, the refundable portion of the credit can be up to $1,600 per qualifying child.
However, many families with lower incomes do not benefit fully from the current structure of the child tax credit since they do not owe any income tax. To address this issue, the proposal aims to increase the maximum refundable portion of the credit. For tax year 2023, it would be raised to $1,800, followed by $1,900 for tax year 2024, and ultimately reaching $2,000 for tax year 2025.
The objective of this proposal is to target assistance towards those children who are most in need of it. Kris Cox, deputy director of federal tax policy at the Center on Budget and Policy Priorities, has expressed support for this targeted approach.
It’s important to note that while this bipartisan agreement is a step towards addressing child poverty, it is not as extensive as the temporary expansion of the child tax credit enacted under the American Rescue Plan of 2021. That measure increased the credit by a minimum of $1,000 per child in that year and made it fully refundable. Unfortunately, child poverty rates rose in 2022 after the additional credit expired. This new proposal is an effort to alleviate the impact of this increase in poverty.
If this proposal is passed, it would take effect for tax years 2023, 2024, and 2025. The announcement of this agreement was made by Senate Finance Committee Chairman, Ron Wyden (D-Ore.), and House Ways and Means Committee Chairman, Jason Smith (R-Mo.).
Groundbreaking Changes to Child Tax Credit
One groundbreaking aspect of the deal is that the $2,000 child tax credit would be indexed for inflation in 2024 and 2025. This update is expected to benefit middle-income and affluent families, who will be able to take full advantage of the $2,000 credit per child. It’s important to note that the credit will gradually decrease for incomes over $200,000, or $400,000 for married couples filing jointly, and this wouldn’t change under the proposed measure.
Furthermore, the new measure would provide additional benefits to families with multiple children. Instead of a per-family basis, the calculation of the refundable credit would shift to a per-child basis. For example, a mother with two children who earns $15,000 would receive a $3,600 child tax credit for 2023, an increase from the current amount of $1,875 according to the Center on Budget and Policy Priorities.
The anticipated impact of these modifications is substantial. In its first year, the proposal is projected to benefit more than one in five children under 17 and could potentially lift up to 400,000 children above the poverty line, as stated by the Center on Budget and Policy Priorities’ analysis. A Senate release highlights that around 16 million children from low-income families would experience improved financial conditions due to this plan.
It’s worth mentioning that the expanded tax credit will expire at the end of 2025 along with the current marginal tax rates and other changes established by the Tax Cuts and Jobs Act of 2017, unless Congress takes further action.
While there is bipartisan support for this proposal, it is by no means a guaranteed outcome. Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, cautions that there are still significant hurdles to overcome. Although sponsors aim to pass the legislation by the start of the tax season on Jan. 29, it is more likely to be approved in late February or March, he suggests.