Should Congress Extend the Tax Credit for Child Care and Dependent Care?

This bill is part of the Kentucky docket.

The proposed bill aims to expand the Child Tax Credit, offering eligible taxpayers $3,600 for each child under 6 and $3,000 for children aged 6-17 claimed on their federal income tax return. Half of this enhanced credit will be distributed in monthly payments starting in Fiscal Year 2025, with the remainder provided upon filing the 2025 tax return. To qualify, taxpayers must have filed a return in the previous year. The Internal Revenue Service will oversee the implementation of these changes. To fund this expansion, the bill proposes increasing the corporate income tax rate to 35%. Set to take effect in Fiscal Year 2025, this legislation will supersede any conflicting laws, potentially providing significant financial support to families with children while adjusting the tax burden on corporations.

The bill would substantially increase the Child Tax Credit, providing $3,600 for children under 6 and $3,000 for children aged 6-17.

This represents a significant boost compared to the current maximum credit of $2,000 per child. The increased credit would provide much-needed financial assistance to families, especially those with low incomes.

Monthly payments. By distributing half of the credit in monthly installments, the bill would provide regular, predictable financial support to families throughout the year.

This approach could help families better manage their expenses and reduce financial stress.

Poverty reduction.

The expanded credit is likely to have a substantial impact on child poverty. Similar expansions in the past have been shown to lift hundreds of thousands of children out of poverty.

This could have long-term positive effects on children’s health, education, and future economic prospects.

Broad eligibility. The bill maintains a relatively simple eligibility criterion, requiring only that taxpayers have filed a tax return in the previous year. This broad eligibility could ensure that most families with children benefit from the expanded credit.

Cons

Cost and funding mechanism

The bill proposes to fund the expanded credit by increasing the corporate income tax rate to 35%. This significant tax hike could face strong opposition from businesses and some lawmakers. It might also have broader economic implications, potentially affecting job creation and economic growth.

Administrative challenges. Implementing a monthly payment system for millions of families could pose significant administrative challenges for the Internal Revenue Service.

The agency would need to develop new systems and processes to manage these regular payments accurately and efficiently.

Potential work disincentives.

Some critics argue that expanding the Child Tax Credit without work requirements could discourage employment among low-income parents.

This concern, while debated, might pose a political obstacle to the bill’s passage.

Inflation concerns. A significant increase in government spending through expanded tax credits could potentially contribute to inflationary pressures in the economy. This might be a particular concern given the recent history of high inflation.

Temporary nature. The bill specifies that the expanded credit would take effect in FY 2025. Without a clear long-term plan, families might face uncertainty about the future of the benefit, and the temporary nature of the expansion could limit its long-term impact on child poverty and family financial stability.

Background

When the American Rescue Plan was enacted in 2021 it took the Child Tax Credit and expanded its size and eligibility, made it “fully refundable” (meaning it would even go to families that did not owe taxes to the government because it could create a net tax refund that easy payable to them), and began delivering its benefits as monthly payments delivered directly into bank accounts.

Congressman Adam Schiff explained:

Specifically, the Child Tax Credit expansion:

Increased the tax credit from $2,000 to $3,600 per child ages 0-6

Increased the tax credit from $2,000 to $3,000 per child ages 6+

Raised the age limit from 16 to 17

Made the tax credit fully refundable and removed the earnings requirement

For families whose struggles had been exacerbated by the pandemic, the expanded credit proved to be a literal life saver, and — in a significant departure from traditional welfare programs — left it to the parents to decide where that money was most needed. For some, it went to food; for some, getting their kids to the dentist; for some, paying for child care.

But one key political player saw the expanded Child Tax Credit in very different terms. West Virginia Sen Joe Manchin, who had repeatedly upended the Democrats’ ambitious social spending plans and whose support was crucial to whatever legislative success his party would achieve, was an adamant opponent of the credit. Without work requirements, he argued, people would simply opt out of the work force. Ultimately, given that success or failure rode on Manchin’s vote, party leaders didn’t include the program in their last-ditch effort to salvage Biden’s agenda, the Inflation Reduction Act.

The impact of the end of the expanded Child Tax Credit was swift and dramatic. By one count, some 4 million children returned to poverty. And according to one prominent Democratic pollster, Stan Greenberg, its expiration also may hurt Democratic prospects in the fall campaign

According to an analysis from the Tax Policy Center, a collaboration between the Urban Institute and the Brookings Institution, more than 90% of families with children under the age of 18 will receive some benefit from the new law. Advocates pointed to research that the expanded credit could reduce child poverty in the U.S. by 45% and have called for the credits to be made permanent.”

The Child and Dependent care tax credit available only through the end of 2022 October 2022

“Time is running out to claim the expanded Child Tax Credit that could bring an eligible family as much as $3,600 per child under the age of 6.

“Taxpayers who are paying someone to take care of their children or another member of household while they work, may qualify for child and dependent care credit regardless of their income. For tax year 2021, the maximum eligible expense for this credit is $8,000 for one child and $16,000 for two or more. Depending on their income, taxpayers could write off up to 50% of these expenses.”

For the purposes of this credit, the Internal Revenue Service (IRS) defines a qualifying person as:

A taxpayer’s dependent who is under age 13 when the care is provided.
A taxpayer’s spouse who is physically or mentally unable to care for themselves and lived with the taxpayer for more than half the year.
Someone who is physically or mentally unable to take care of themselves and lived with the taxpayer for six months and either:
The qualifying person was the taxpayer’s dependent or
They would have been the taxpayer’s dependent except for one of the following:
The qualifying person received gross income of $4,300 or more
The qualifying person filed a joint return
The taxpayer or spouse, if filing jointly, could be claimed as a dependent on someone else’s return”