Congress is considering increasing the child tax credit.
The House of Representatives on Wednesday passed a $78 billion bipartisan tax package that would temporarily expand the child tax credit and restore several business tax breaks. The bill now heads to the Senate, but its fate there remains unclear.
Overall, the deal will have little impact on the federal budget. It is expected to reduce revenues by less than $400 million over 10 years.
Here are the details:
What the contract will do:
This will increase the maximum refundable credit for households with little or no income tax debt. This will enable low-income families to apply for more loans.
Low-income families with more than one child will receive the same credit for each child as higher-income families.
Families will have the option of using their earnings in the current year or the previous year if their earnings are variable.
The loan will be adjusted to inflation starting from 2024.
The provisions will be effective for three tax years from 2023 to 2025.
What the contract will not do:
Unlike the expansion of the temporary child tax credit in the American Rescue Plan Act of 2021, the current deal will not increase the size of the credit to $3,600 for many families and will not make the full credit available to low-income families regardless of earnings, nor will it distribute half of it monthly.
It will not change the minimum earnings threshold of $2,500 needed to start claiming the loan.
This does not change the requirement that children have Social Security numbers for their families to apply for loans.
What will be the impact on families:
The deal will provide a larger loan in the first year to approximately 16 million children in low-income families, or to the more than 80% who currently cannot get a full loan because their families earn too little. – Center on Budget and Policy Priorities.
About half of the 16 million children live in households earning $630 or more, according to the center.
According to the center, more than 1 in 3 of all Black and Latino children under age 17, 3 in 10 of all American Indian and Alaska Native children, and 1 in 7 of all white and Asian children will benefit in the first year.
According to the center, the package will lift at least half a million children out of poverty and improve the financial situation of another 5 million children who will be below the poverty line after the proposal takes full effect in 2025.
Middle- and high-income families, as well as some low-income families, will benefit to some extent from the inflation adjustment provision. According to the center’s forecast, the maximum credit will increase from the current $2,000 to $2,100 per child in 2025.
According to the Bipartisan Tax Policy Center, the child tax credit and business tax changes will increase after-tax income for households by an average of $160 in 2023, with lower-income and higher-income taxpayers receiving more substantial tax cuts.
Business tax benefits and other provisions
What the key business provisions in the package will do:
Businesses can immediately deduct the cost of U.S.-based research and development investments for no more than five years.
The deal will restore businesses’ ability to immediately withdraw 100% of their investment in machinery and equipment.
This will ease the tightening restrictions on the deductibility of interest expenses, which mainly affect heavily indebted companies.
These tax breaks were originally part of the GOP Tax Cuts and Jobs Act of 2017, but recently ended or began to be phased out.
The three provisions are valid until 2025.
What other clauses will do:
The package would eliminate existing double taxation for businesses and employees operating in both the US and Taiwan.
This will increase the amount of investment that the small business can immediately write off. After that, the upper limit will be indexed to inflation starting from 2024. This provision will not expire.
The agreement will help those affected by disasters, including recent hurricanes, floods, wildfires and last year’s Ohio train derailment in East Palestine.
It would strengthen the Low Income Housing Tax Credit to increase the supply of low-income housing. According to Novogradac, this will provide more than 200,000 new and preserved affordable rental homes.
This would speed up the deadline for filing backdated claims for the Employee Retention Credit, a widely fraudulent Covid 19-era program, to January 31, 2024 instead of April 15, 2025. This provision is estimated to save taxpayers more. More than $78 billion — according to the Joint Committee on Taxation — offsets most of the package’s cost.
This story has been updated with additional developments.