What you need to know about the child tax credit in 2023

The two big loans are back to pre-pandemic levels, meaning parents could get much smaller tax refunds this year.

WASHINGTON. With several extended tax credits and deductions expiring in the era of the pandemic, many parents may receive much smaller tax refunds this year.

The Child Tax Credit and the Child and Dependent Care Credit are falling back to their previous levels, meaning parents could get several thousand dollars less than they expected. Here’s what you need to know.

What is a child tax credit?

The Child Tax Credit is a tax credit for qualifying families with children. It has become much more generous in 2021, with many families receiving half of the loan in monthly down 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 under 5 and $3,000 for children aged 6 to 17.

CONNECTED: Why is my tax refund so low this year?

Because Congress decided not to renew the expansion, the child tax credit returned to $2,000 per eligible child in tax year 2022. Families can claim this full amount, but it’s not fully refundable, meaning it can only reduce your tax bill to zero, not affect your refund.

So what if the child tax credit is more than you owe? There is another way to put some of this money in your pocket. According to the Consumer Financial Protection Bureau, you can claim up to $1,400 of the remaining child tax credit for each 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 qualify for the child tax credit when applying this year: age, relationship, dependent status, residency, financial support, citizenship, and income.

For example, the child must be your dependent and be under the age of 17 at the end of 2022. They must have a family relationship with you, including a son or daughter, sibling, adopted child, grandson, niece or nephew, etc.

There are also income requirements. TurboTax says that caregivers with a modified adjusted gross income of over $400,000 (married) or $200,000 (other enrollment statuses) will have a slightly reduced credit for every $1,000 they earn above that limit. At the other end of the spectrum, families need at least $2,500 in earned income to qualify for a reimbursement loan.

Other Tax Credit Changes

Another family-related loan, the Child and Dependent Care Loan, will also return to 2019 levels.

This loan, designed to help working parents pay the cost of childcare and other dependents, has increased to $8,000 in 2021. In 2022, the maximum is reduced again to $1,050 for one eligible person and $2,100 for two or more people.

These changes in tax credits and benefit entitlements included in the American Rescue Plan were largely in response to COVID, explained Braden Williams, an assistant professor of accounting at the University of Texas at Austin. Extended tax credits and stimulus checks were ways to encourage economic activity after the pandemic wreaked havoc on Americans’ finances.

“(C) those types of accounts that are meant to stimulate the economy, to encourage growth in investment, you have to give up income to do that,” Williams said. “Therefore, they are often written into the law as temporary tax provisions … after a while they gradually cease to exist or simply disappear.”

And as many tax breaks return to their pre-pandemic levels, there is bound to be heightened focus on the looming debt ceiling in the coming months as well.

“The purpose of the tax system is, first and foremost, to increase revenue to fund the government,” Williams said. “The cost of a very large child tax credit is [that] you give away tax revenue. Right now we see in the debt ceiling talk that there are some caps on the income side.”

Melissa Hernandez De La Cruz contributed to this report.

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