States Take Child Tax Credits Into Their Own Hands

“What now?” is a question many families are asking, especially those who began receiving expanded child tax credits at the federal level only to see them not be renewed by Congress at the end of last year.

The short-term economic and societal benefits of the federal government’s expanded 2021 child tax credit legislation has not gone unnoticed by state legislators. In fact, the successful impact of the federal government’s expanded child tax credit for 2021 has motivated a number of states to enact similar tax relief for eligible families. An ever-expanding list of states appear to be taking matters into their own hands as they enact (or amplify) legislation aimed at creating tax savings for families who may need them the most.

More and more state lawmakers are advocating tax relief measures for their constituent resident families. Tax relief, for most participating states, is taking the form of a state-level child tax credit that supplements any eligible child tax credit the family qualifies for on their federal return. Therefore, from a planning perspective, it is important to be aware of:

1. which states are implementing child tax legislation
2. who qualifies
3. how much tax relief can be anticipated

Tax Year 2021 – Review of the Expanded Child Tax Credit

Many families have already filed their 2021 tax returns. However, families who have yet to file, have until October 15 to benefit from the federal American Rescue Plan’s expanded child tax credit for tax year 2021. Below is a summary of those federal tax law enhancements:

• Raising the eligibility age of children by one year, to include children up to age 17
• Increasing the credit total from $2,000 per child to $3,000 per child, for children ages 6 to 17
• Increasing the credit by $600 (up to $3,600 per child) for children under age 6
• Allowing the child tax credit to be fully refundable

Prior to 2021, a very limited number of states offered any type of child tax credit relief for families. The success of the 2021 federal child tax credit enhancements generated increased state policymaker attention. As a result, the list of states who have enacted some component of child tax credit relief has continued to swell over the past couple of years. Some states have already instituted tax law changes which piggy-back off the federal child tax credit changes while other states have opted to enact tax law changes that are less directly associated with federal law.

Mapping It Out

Thus far, the following states have enacted legislation that provides some level of child tax credit relief for 2022 and/or years thereafter, either in the form of a refundable or non-refundable state tax credit:

The amount of the child tax credit, as well as eligibility of who qualifies for tax relief, can vary widely from state to state.  A review of the participating states reveals a broad spectrum of tax filing circumstances in which families can obtain state child tax credit assistance. For the most part, states are focusing their child tax credit eligibility on income levels; however, the income thresholds for qualification are almost as diverse as the amount of the credit itself.

For example, Maryland has an earnings limit (among other requirements) as low as $6,000 whereas Connecticut allows for an income level as high as $200,000 for married filing joint couples. Likewise, the amount of the child tax credit itself can vary by state as well. In some instances, the credit might be a percentage of the federal child tax credit and refundable (i.e., Colorado, New York) or non-refundable (Oklahoma). Other states may only provide a fixed child tax credit and allow it as refundable (Vermont) or non-refundable (Idaho).

Tax Law Change Challenges

The challenge for practitioners is to not only be familiar with the states having already enacted child tax credit legislation but to also be aware of the additional states who are considering it. Some states may end up enacting new legislation later this year, just in time to impact the 2022 tax filing season. States currently contemplating child tax credit (or deduction) enhancements include Illinois, Michigan, North Carolina and Rhode Island.

Needless to say, the child tax credit continues to be an evolving area of tax law for many states. This appears to be the direction states are moving despite the fact an extension of the federal government’s 2021 expanded child tax credit does not appear to be likely in the foreseeable future.