The Tax Relief for American Families and Workers Act of 2024 has passed the House and is currently before the Senate. It contains a proposed expansion for the Additional Child Tax Credit.
The Additional Child Tax Credit
Understanding the basic Child Tax Credit is necessary to understand the Additional Child Tax Credit. Most of us are familiar with the Child Tax Credit, which can be taken on a tax return that meets the requirements and claims qualifying dependent children. It can reduce your tax liability by as much as $2,000 for each qualifying child. Several tax credits, including the Child Tax Credit, may reduce your tax liability to zero.
Unfortunately, your tax liability may be reduced to zero before the entire amount of your Child Tax Credit is used.
For example, a return with one qualifying child would have a Child Tax Credit of $2,000. If the taxpayer’s tax liability were $1,500, the Child Tax Credit would only be used up to that amount, and $500 would be unused.
The good news is that under certain circumstances, all or some of the unused portion of the Child Tax Credit may be refunded. This refund of the unused Child Tax Credit is the Additional Child Tax Credit.
Limitations on the Additional Child Tax Credit
Like many other credits and deductions, the Additional Child Tax Credit has limitations. Three primary items are considered when determining the maximum limit to be refunded to a taxpayer. The items for tax returns claiming three or more children differ slightly from those claiming only one or two children.
The smallest of the three items will determine the maximum credit limit. I’ve provided two separate lists based on the number of children claimed on the return.
Limit for taxpayers with one or two children
The least of:
- The actual unused portion of the Child Tax Credit
OR
- 15% of the taxpayer’s earned income for the year (wages and self-employment income) in excess of $2,500
OR
- $1,600 (2023) Overall Limit
Limit for taxpayers with three or more children
The least of:
- The actual unused portion of the Child Tax Credit
OR
- The greater of – 15% of the taxpayer’s earned income for the year (wages and self-employment income) in excess of $2,500- OR – the taxpayer’s Social Security and Medicare taxes paid in excess of their Earned Income Tax Credit (if applicable)
OR
- $1,600 (2023) Overall Limit
Example:
Let’s continue with the example from earlier. Assume the taxpayer had earned $11,000 in wages for the year. The three amounts would be:
- $500 (the unused portion of the Child Tax Credit)
- ($11,000 – $2,500) x .15 = $1,275
- $1600 (ultimate cap on the credit for 2023)
This taxpayer’s Additional Child Tax Credit would be $500 because it is the smallest of the three.
Proposed Changes
The bill’s current version increases the overall maximum limit for the tax year 2023 from $1,600 to $1,800. The limit would also be increased to $1,900 for 2024 and $2,000 for 2025.
Since the limit of the refundable credit may instead be determined by the taxpayer’s lower earned income or Social Security and Medicare taxes, the credit is often reduced for lower-income households.
The bill attempts to remedy the reduced credit by increasing the maximum limit based on the taxpayer’s earned income or Social Security and Medicare taxes by multiplying those amounts by the number of children who qualify for the credit. That would increase that maximum limit for those with more than one dependent child and potentially increase the refundable credit.
The bill also allows taxpayers to calculate the maximum limit using the earned income from the preceding year if it’s higher. That would be effective after the tax year 2023.
Don’t Wait to File Your 2023 Tax Return
This article discusses what might happen if the current bill becomes law. It remains to be seen whether any changes will be made to the bill and whether it will even pass.
According to a press release on the House Ways and Means Committee site, IRS Commissioner Danny Werfel states that taxpayers will not have to amend returns already filed if the bill passes. The IRS will issue any additional refunds. He also states that this would only impact about 10% of households.
There’s no need to wait to file your current tax return. If you need your federal tax return e-filed, contact Sydnie Fiesel Tax Services.
