How the proposed child tax credit changes could affect 2023 taxes

House lawmakers on Friday advanced a $78 billion bipartisan tax package, which includes temporary child tax credit changes that could affect millions of families this filing season.

The plan temporarily expands access to the child tax credit with retroactive changes. If it is enacted, eligible families could see an average tax cut of $680 for 2023, according to estimates from the Urban-Brookings Tax Policy Center.

While the bill cleared the House Ways and Means Committee on Friday, negotiations may still continue, and the path forward is unclear. The tax bill is on hold while the House is on recess this week.

Currently, the child tax credit is worth up to $2,000 per qualifying child under age 17 for 2023 and reduces your taxes on a dollar-for-dollar basis.

“For most median-income Americans, you’re getting the full $2,000” because you’re likely to have at least that much tax liability, said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

The tax break begins to phase out with modified adjusted gross income, or MAGI, of $200,000 for single filers and $400,000 for married couples filing together.

Up to $1,600 of the credit is currently refundable for 2023, meaning the credit could provide a refund even with zero taxes owed. This makes the credit harder to access for lower earners, who typically have little to no tax liability.

“Individuals who don’t have a lot of earned income may hardly qualify for hundreds of dollars worth [of the credit] or maybe none at all,” Lucas said.

If enacted, the bipartisan tax bill would make several temporary changes to the child tax credit that could benefit the lowest-earning Americans, according to the Urban-Brookings Tax Policy Center.

The refundable portion of the child tax credit would increase to $1,800 for tax year 2023, $1,900 for 2024 and $2,000 for 2025 — and a new calculation would expand access.

The current calculation for the maximum refundable credit multiplies earned income above $2,500 by 15%. But the new formula would be on a per-child basis — allowing families to use the same formula and then multiply it by the number of qualifying children. This means more lower-income families with multiple children would qualify for a higher credit.

“The child tax credit is upside down because it gives more benefits to higher-income people than lower-income people,” said Chuck Marr, vice president for federal tax policy for the Center on Budget and Policy Priorities. “This is an attempt to at least partially fix that.”

For tax years 2024 and 2025, filers may use the prior year’s earned income to calculate the credit, and the provision also adjusts the $2,000 tax credit for inflation.