The tax revision bill as it passed recently, allows families in low-income brackets to claim more in per-child credits. The credit was $1,000 per child and now it is $2,000. If the household tax liability is below zero, the credit is refundable as a tax return.
Sounds good, but tax experts say the expanded tax credit may actually provide little relief for poor families. It’s complex.
Until now, families could claim the credit for each child under 17 whom they housed and provided for for six months in the relevant year. The credit began to phase out when gross income reached $75,000 for a single parent or $110,000 for couples. The proportion of families that received the credit and the average amount of the credit is now higher among moderate- and middle-income households than in low-income households, according to the Tax Policy Center. Even so, the credit helped some 2.7 million taxpayers in 2016.
So now the credit has been raised to $2,000 per child and the income thresholds have been raised to $200,000 for single taxpayers and $400,000 for couples. For families who earn too little to owe taxes, the bill allows a refund of up to $1,400. These provisions are due to expire in 2026. The bill also requires that parents seeking the child credit to provide a Social Security number for the child, a move calculated to deny the credit to illegal aliens. It is estimated that some 1 million children would be harmed by that provision.
On the surface all of this is good news for American families, but the provisions will provide little help for lower-income families, some tax experts say. Because of how the rules are written, some 10 million children are likely to receive only a token increase — up to $75 per family, they say. That’s because the refundable portion of the credit doesn’t become effective until the family has income of $2,500. For each additional dollar earned the family receives a refundable credit worth 15 cents until it reaches the maximum credit of $1,400. Many families are likely never to come close to the necessary income level.
The increased child credits also will be offset by the new tax bill’s elimination of personal exemptions. Until now, taxpayers could deduct from their income a $4,050 exemption for himself or herself and for each dependent. No longer will that benefit be available.