If the proposed changes to the tax credits by Joe Biden were to go through — and they are likely to — working families can certainly find more “wiggle room” in their budgets going forward. This new proposal will increase financial assistance in two major areas of expense: Child-Related Credits (with regards to childcare expenses) and support for first-time homebuyers, thus relieving some of the most difficult financial burden associated with raising children, being a parent and buying housing.
Before discussing the details of this new tax proposal, it’s important for you to understand one important concept: Tax credits and tax deductions are not the same thing. A tax deduction lowers your taxable income, which in turn reduces how much (or often if) you will have to pay taxes on that income. Conversely, tax credits directly reduce (dollar-for-dollar) the amount of taxes that you owe. This makes the value of tax credits much higher than the value of tax deductions.
One of the largest proposed enhancements is to change the way the Child and Dependent Care Tax credit is calculated. Currently, a family can receive a limited amount of Child Care expenses for purposes of computing their Child and Dependent Care Tax credit; the percent of expenses that you receive back varies based upon your family’s income. Under this new tax proposal, the amount of Child Care expenses allowed will be greatly increased, and the refundable percentage of the child/Dependent Care credit will be better commensurate with the “need” for the support from the government (especially in the case of lower-income households). This will hopefully allow for children to have access to daycare, after-school care, and other services that will assist in allowing their parents to stay employed without taking away from the children’s emotional (or financial) support.
To change the subject, the child tax credit, which is what Biden’s proposal will address, is similar to the child care tax credit, but not the same at all. Currently, you get a flat amount of money for each qualifying child. Biden would increase the amount you get, the age of eligible children, and provide an additional benefit for young children. This is intended to help families with the increased costs of education, remote learning, and the everyday expenses of raising children.
But it’s not just about parents either. There is also an effort to restore the first-time homebuyer tax credit that was created after the 2008 financial crisis. Biden is proposing a much larger credit for first-time homebuyers, and it will be available when you buy your home, instead of forcing you to wait until the following tax season to receive your credit. For young adults and new families wanting to purchase a house, it will make owning a home seem possible now that home prices are increasing all over the country.
If you are asking who will receive the most benefit, the answer is that low to middle-income families will benefit the most from this program. These types of tax credits will be phased out for high-income earners and focused on low and middle-income families who are more likely to lose their jobs due to a recession or have difficulty supporting themselves and their families due to high living expenses.
In a larger sense, this is about rebuilding and stabilizing families financially as the result of the economic crisis that occurred from the COVID-19 pandemic. Families with children will benefit from relief from the costs associated with raising children; families with children will be able to expand their families; and families that are struggling to purchase a home will have an opportunity to either purchase their first home or move from their current home into a bigger one.
So, do you believe these programs will provide you and your family with a lot of financial benefits, or will they simply be another example of political promises? If the tax credits are administered correctly, then yes, they will have a very positive effect on the finances of your family and your ability to save money.
