As the end of the year approaches, Americans are getting ready for yet another tax season. Those looking to reduce the size of their tax bills are always on the lookout for credits and deductions to take, but in some cases, a tax break that was available one year can be gone the next.
That looked like it would be the case for the Child Tax Credit, which briefly expanded as one of many temporary measures enacted to provide financial assistance to Americans in the early stages of the COVID-19 pandemic. Although the enhancements to the Child Tax Credit expired at the end of 2021, some lawmakers are now looking for a last-minute extension that would provide additional money to taxpayers on their 2022 tax returns.
What a difference a year makes
The Child Tax Credit provisions in 2021 offered big boosts over what previous law had allowed. Taxpayers could claim up to $3,600 for each child age 5 or younger, along with $3,000 per child age 6 through 17. The law changes also allowed qualifying parents to receive the credit regardless of earned income, and it made the credit refundable. Many taxpayers received a portion of the credit amount in the form of monthly checks or direct deposits during the 2021 calendar year, long before they actually filed tax returns. Enhanced Child Tax Credit amounts were available for taxpayers with earnings up to specified maximum income levels, with phase-outs taking away the extra credit amounts for those with incomes above those thresholds.
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However, the legislation that expanded the provisions of the Child Tax Credit didn't cover the 2022 tax year or beyond. As a result, absent further action from lawmakers, the Child Tax Credit will revert to its pre-pandemic provisions for 2022. That will reduce the size of the maximum Child Tax Credit to $2,000 per child, and only a maximum of $1,400 of that amount is potentially available as a refundable credit for taxpayers without any other income tax liability to offset.
How the bigger Child Tax Credit could come back
Toward the end of each year, lawmakers in Congress often consider last-minute changes to tax provisions. This action can preserve tax breaks that would otherwise expire at the end of the current year to make them available in future years as well. However, these "tax extender" provisions sometimes retroactively take tax laws that have already technically expired and restore them for the tax year that's about to end.
Some lawmakers want to make the temporary boost to the Child Tax Credit permanent. They cite the positive impacts of higher payments in reducing child poverty and allowing parents to return to work, and they've asked leaders in Congress to make restoration of higher Child Tax Credit amounts for 2022 and beyond a priority in their year-end considerations.
The challenge, though, is that an expanded Child Tax Credit would require a substantial increase in government spending. Government estimates put the cost of making the provisions permanent at $1.6 trillion for the decade from 2022 to 2031, with annual costs exceeding $200 billion by the end of the period. That's a difficult ask when lawmakers already face the prospect of another potential conflict on raising the U.S. government's statutory debt ceiling.
What should taxpayers expect?
At this point, it's a long shot that families will enjoy the full benefits of 2021's Child Tax Credit provisions for the 2022 tax year. You shouldn't do any financial planning that counts on getting those higher amounts. Yet with several weeks still left before the end of the year, all eyes will be on Washington to see whether taxpayers will get an extra year-end tax break to celebrate the new year.
