Have a child? You may soon be able to save more money thanks to an expanded federal tax credit.
At Edward Street, we're all about helping families access high quality childcare and early education services without breaking their budgets. Today, we're looking at the Child Tax Credit (CTC) and what it means for families in Massachusetts and across the United States.
What Is the Child Tax Credit?
CTC offers a tax break for all families. It is an important tool to advance equity and reduce childhood poverty.
You may be eligible for the credit for each qualifying child in your family. The credit may be available even if you don't typically file a tax return.
How Can You Use the Child Tax Credit?
To receive the credit, each qualifying child in your family must meet all IRS eligibility factors.
You must have an annual income of at least $2,500 and no more than $200,000 if you file individually or $400,000 if you file a joint return.
Also, you must file Form 1040 (U.S. Individual Income Tax Return) and attach Schedule 8812 (Credits for Qualifying Children and Other Dependents) to it.
Has Congress Expanded the Child Tax Credit?
Not yet — but things look promising.
In January 2024, the House of Representatives passed a $78 billion tax cut package that would increase CTC for millions of low-income families. The package, which has bipartisan support, would expand the credit for three years.
According to research, about 16 million children from low-income families would benefit from the expanded CTC.
Additionally, the credit could raise up to 400,000 children above the poverty line.
The credit increase would also provide roughly a 5.6% income boost for Black families with children and a 5.2% increase for Hispanic families with children, per the Institute on Taxation and Economic Policy (ITEP).
Along with these things, U.S. households would see a tax cut of $680 for 2023, research suggests.
What Would an Expanded Child Tax Credit Do?
The expanded CTC includes changes across three key areas:
1. Eligibility
Today, CTC requires a parent to earn at least $2,500 in income annually. Thus, a parent with little to no income is ineligible for the credit.
The expanded CTC would allow taxpayers to use their current or prior year's income to calculate their credit. This helps increase a parent's eligibility, since they may qualify for the credit even if their income changes from one year to the next.
2. Calculation
A parent is not currently able to receive CTC for the first $2,500 of their family's income. After this amount, the credit is applied dollar for dollar by multiplying the parent's income by 15%.
The expanded CTC includes a new calculation where a parent's income is multiplied by 15% and the number of children in their family. Therefore, a low-income family with two or more kids may qualify for a larger credit than ever before.
For example, consider a single parent who has two children and earns $13,000 yearly.
In this example, the parent has qualifying earnings of $10,500. As such, they can currently receive a credit of $1,575.
Using the new calculation, this parent can double the amount of their original credit and receive $3,150.
3. Incremental Credit Increases
As of February 2024, there's a cap of $1,600 that a parent can receive for a qualifying child under CTC.
With the expanded CTC, this cap would increase to $1,800 for 2023 tax returns, $1,900 the following year, and $2,000 for 2025 tax returns.
The topline credit amount may also be increased temporarily based on the rate of inflation.
Why Is an Expanded Child Tax Credit Important to Families in Massachusetts?
The expanded CTC would give more families in the Commonwealth access to CTC, and some that already receive the credit would be able to get more money back when they file their federal tax returns.
Massachusetts families could also use the state's child and family tax credit in conjunction with CTC. You can add the child and family tax credit to your state tax return if you take care of a child and meet other criteria.
The Bottom Line on the Expanded Child Tax Credit
Childcare is expensive for many parents. An expanded CTC would offer additional financial support to parents, so they may be better equipped to provide their children with the best care and support possible.
Some parents already reap the benefits of CTC. But the credit is not currently available to all parents. And even those who already receive the credit would surely benefit if additional financial support was available to them.
The expanded CTC would provide more parents in the Commonwealth and across the United States with financial relief. It would also give more families access to CTC and help some that previously qualified maximize their credit.
If you're struggling to figure out if you currently qualify for CTC, use this free tool from the IRS to determine your eligibility
At Edward Street, we track the federal tax credit and other initiatives designed to help Massachusetts families save money. Follow our blog to stay up to date on these initiatives and many others.