WASHINGTON — With several pandemic-era enhanced tax credits and deductions coming to an end, many parents could see much smaller tax refunds this year.
The child tax credit and the child and dependent care credit are both dropping back to previous levels, meaning parents could get several thousand dollars less than they expected. Here's what to know.
What is the child tax credit?
The child tax credit is a tax break for qualifying families with kids. It got a lot more generous in 2021, and many families received half of the credit in monthly advance payments instead of a lump sum. Under the American Rescue Plan passed by Congress in March 2021, the child tax credit was increased to $3,600 for children age 5 and under and $3,000 for those ages 6-17.
With Congress deciding not to extend the expansion, the child tax credit reverted back to $2,000 per eligible child for the 2022 tax year. Families can claim that full amount, but it isn't fully refundable, meaning it can only reduce your tax bill to zero — not show up on your refund.
So what if the child tax credit is more than what you owe? There's still a way to put some of that money in your pocket. According to the Consumer Financial Protection Bureau, you may be able to claim up to $1,400 of the leftover child tax credit per dependent. This is called the Additional Child Tax Credit.
Who is eligible for the child tax credit?
According to Nerdwallet, there are seven "tests" you'll need to pass to claim the child tax credit when you file this year: Age, relationship, dependent status, residency, financial support, citizenship and income.
For example, the child needs to be your dependent and under the age of 17 when 2022 ended. They need to have a family relationship with you, including son or daughter, sibling, foster child, grandchild, niece or nephew, etc.
There are also income requirements. TurboTax says caregivers with a modified adjusted gross income of more than $400,000 (married) or $200,000 (other filing statuses) will have the credit reduced slightly for each $1,000 they earn over that limit. On the other end of the spectrum, families need an earned income of at least $2,500 to get the credit on their refund.
Other tax credit changes
Another credit relevant to families, the child and dependent care credit, will also return to 2019 levels.
This credit, meant to help working parents pay care expenses for children and other dependents, went up to a maximum of $8,000 in 2021. For 2022, the maximum is back down to $1,050 for one qualifying person and $2,100 for two or more.
Slipped into the American Rescue Plan, these changes to tax credits and eligibility were largely a reaction to COVID, explained Braden Williams, an associate professor of accounting at the University of Texas at Austin. The expanded tax credits and stimulus checks were ways to encourage economic activity after the pandemic wreaked havoc on Americans' finances.
"(With) those types of bills that are intended to stimulate the economy, to encourage investment growth, you have to give up revenue to do that," Williams said. "So those are often written into law as temporary tax provisions ... after a while, it phases out, or just disappears."
And as many tax credits revert to their pre-pandemic level, there's also sure to be increased attention in the coming months to the looming debt limit.
"The purpose of the tax system, first and foremost, is to raise revenue to fund the government," Williams said. "The cost of a very large child tax credit is [that] you're giving away tax revenue. We see right now with the debt ceiling conversations that there's some constraints on the revenue side."
Melissa Hernandez De La Cruz contributed to this report.