In recent developments, the U.S. government is making moves to significantly boost the Child Tax Credit (CTC), although the impact may not be as widespread as it initially seems.
A newly passed bill, primarily sponsored by Republicans in the House of Representatives, seeks to expand this crucial tax benefit. However, its design leaves out millions of children, particularly those from the most vulnerable households.
What is the Child Tax Credit (CTC)?
The CTC is a tax benefit available to families with children under 17, aiming to ease the financial burdens of raising children. Under current law, families can claim up to $2,000 per child from their federal taxes.
The goal is to provide middle-class and low-income families with additional financial support, especially in light of rising costs like childcare and housing.
The New Bill and Proposed Changes
The bill, which has already passed the House, contains three main proposals aimed at expanding the Child Tax Credit:
Make the $2,000 credit permanent: The bill proposes to keep the current $2,000 CTC established under the 2017 tax reform (during the Trump administration).
Temporarily increase the CTC: The proposal would raise the maximum credit to $2,500 per child for children under age 17 from 2025 to 2028.
Indexing for future inflation: Starting in 2028, the CTC would be automatically adjusted based on inflation to preserve its purchasing power.
These changes have received strong support from advocates like Representative Jason Smith (Republican from Missouri), who argues that this increased support is vital due to soaring childcare costs, which have risen more than 200% in the last three decades, and housing costs that are becoming unaffordable for many families. Smith calls the CTC “a critical investment in America’s future workforce.”
Eligibility Requirements for the Expanded CTC
To receive the full expanded CTC benefit of $2,500, families must meet the following conditions:
Age: The child must be under 17.
Social Security Number (SSN): Both the parent and child must have valid SSNs.
Income limits: The credit begins to phase out for taxpayers with an adjusted gross income (AGI) above $400,000 for married couples filing jointly, or $200,000 for single filers or heads of household.
Additionally, $1,700 of the total CTC would be refundable starting in 2025. This means that even if a family does not owe any taxes, they could still receive this amount as a refund.
The Problem with the Refundable Component
Here’s where the big stumbling block occurs: the refundable component of the CTC only increases by 15% for every dollar of income above $2,500. This makes it very difficult, if not impossible, for households with low or no taxable income to receive the full $1,700, let alone the $2,500 expansion.
This issue is especially concerning for families with very low incomes, who are often left out of such benefits due to income thresholds and the structure of the formula.
Who Will Miss Out on the Expanded CTC?
Despite the proposed increase, millions of vulnerable children will still be left behind. Here are the groups who will not benefit from the expanded CTC:
Families with no taxable income or very low taxable income: These families will still miss out on much of the proposed credit expansion due to the design of the refundable component.
Children whose parents lack a valid SSN: An estimated 4.5 million children who are U.S. citizens or legal residents could lose eligibility for the CTC if their parents don’t have a valid SSN, even if the child does.
The Senate Threatens to Cut Residential Solar Tax Credits
While the CTC may be growing (though with limitations), another key tax credit for energy transition faces drastic cuts. A proposal in the Senate is threatening to accelerate cuts to solar energy tax credits, which are crucial to the Inflation Reduction Act (IRA) of 2022.
These credits allow homeowners to deduct a significant portion of the cost of installing solar panels on their homes from their federal tax bills.
Under the current law, solar and wind energy credits were set to remain strong until 2032. However, the Senate Finance Committee’s proposal suggests:
Accelerated cuts: The solar (and wind) energy credits would be reduced to 60% of their current value by 2026.
Premature phase-out: The solar credits would expire completely by 2028, four years earlier than initially planned.
Direct impact on residential solar installations: The credit for residential solar installations would be cut 180 days after the bill is passed, meaning the benefits for home solar installations could disappear by the end of 2025.
Additionally, the proposal offers more favorable terms for other renewable energy sources, such as hydroelectric, geothermal, and nuclear, with tax credits extended until 2036.
This disparity has led to criticism that traditional energy sources may receive preferential treatment, while families looking to transition to clean energy face more immediate hurdles.