Major Changes to the Child Tax Credit in 2023
What Tax Preparers need to know
The child tax credit, a vital financial benefit for families across the United States, is on the brink of significant transformation. With recent developments in Congress, tax preparers need to be on high alert to guide their clients through these changes effectively. Here’s everything you need to know about the proposed expansion of the child tax credit for the tax year 2023.
The Expansion Proposal
On a recent Wednesday night, the House of Representatives passed a bill that, if enacted, would considerably augment the child tax credit for lower-income families, especially those with multiple children. This legislative change aims to provide substantial financial relief and support to the families who need it most.
Key Changes to Understand
- Increased Credit Amounts: The expansion targets lower-income families for the tax year 2023, particularly benefiting those with several children. Under the proposed changes, the credit amount would “phase in” with income, allowing a larger credit for families with higher earnings, up to $2,000 per child.
- Adjustment for Multiple Children: Unlike the current policy, where the credit phases in at a consistent rate regardless of the number of children, the new expansion allows for a multiplied maximum amount based on the number of children in the family. For example, a married couple making $12,500 annually could receive $1,500 for one child, $3,000 for two children, and so on.
- Refundability Increases: If the child tax credit exceeds a family’s income tax bill, they can receive the excess as a refund. Currently, the maximum refundable amount is $1,600, but under the proposed expansion, this would increase to $1,800 for the 2023 tax year. By 2025, families could receive the full credit as a refund, even if they owe no income taxes, provided they have an income of at least $2,500.
Implementation and Claiming the Credit
Tax preparers should advise their clients that, should the bill become law, no additional steps are required to claim the expanded child tax credit for 2023—filing taxes as normal suffices. The IRS will automatically adjust returns eligible for a larger refund under the expansion, with adjusted refunds expected to be issued six weeks post-enactment.
The proposed changes not only benefit a broader range of families in the next two years by increasing the maximum credit and its refundability but also introduce more flexibility in income calculation for the credit. Starting in 2024, a “lookback” provision will allow families to use whichever income from the past two years grants them a higher credit. However, tax professionals should note that the expansion is set to expire in 2026 unless Congress acts to extend it.
For tax preparers, staying informed about these potential changes is crucial for providing accurate, beneficial advice to clients navigating the complexities of the tax season. The expanded child tax credit represents a significant shift in tax policy aimed at supporting lower-income families, emphasizing the need for tax professionals to understand these changes thoroughly.
Tax preparers, let’s gear up to guide our clients through these changes, ensuring they receive the maximum benefits they’re entitled to under the new law. Your expertise and advice are more valuable than ever in helping families navigate these significant updates to the child tax credit.