At the start of the COVID-19 pandemic, many of us were left scrambling. Since no one knew anything about the virus, we stock-piled food and hoarded supplies, just like you would do a war. Publicly mandated shutdowns left us grabbing whatever we could from our office in preparation to work from home for an unprecedented amount of time. Entire industries were shut down, leaving many in the hospitality industry jobless.

To help those facing financial hardship, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provided economic stimulus payments and extended unemployment benefits, including a higher amount than usually offered. American families also saw relief with the American Rescue Plan, which extended the amount offered for the Child Tax Credit benefit and the Child and Dependent Care Credit to help with COVID-related expenses.

Now, those same families are scrambling to find out what happened to those tax credits and why their returns are now smaller than they had initially anticipated.

What Are The Child Tax Credit And The Child Care and Dependent Care Credit?

“The Child Tax Credit is a tax benefit to help families with children under the age of 18 with a valid social security number, while The Child and Dependent Care Credit is a tax break for working families to help pay expenses for childcare or dependents with disabilities” explains Sonia Castelan, a 1st Generation Latinx Tax Professional and the founder of Castelan Tax Services.

Respectively, the Child Tax Credit is up to $2,000 per qualifying child and will show up on your tax return with no additional steps.

Since the Child and Dependent Care Credit is a tax break, the amount you can receive is dependent not on having the children themselves but, instead, on how much you spend on services to provide care while you’re at work. The credit can be up to 35% of your qualifying expenses (up to $3,000) for a max credit of $1,050 for one child or dependent. If you have two or more children or dependents, you can submit up to $6,000 in qualifying expenses to receive up to a maximum credit of $2,100.

While the above numbers have been consistent, the American Rescue Plan passed in 2021 changed that. For the 2021 tax year, the American Rescue Plan expanded the amount for both of these tax credits by a significant amount. The child tax credit jumped to $3,600 per child under age six and then $3,000 for each child ages 6-17. This credit was also fully refundable, which means you received it even if you owed taxes.

For the Child and Dependent Care Credit, you were able to increase your qualifying expenses up to $8,000 for one dependent and up to $16,000 for two or more dependents. That’s not all. Your credit percentage changed from 35-50% of your qualified expenses. This means some families received a tax break of up to $8,000 instead of the usual $2,100 they were originally used to.

What Happened?

On January 23rd, 2023, the IRS said in a news release that those who are filing their 2022 taxes need to be aware that their refunds will be a lot smaller this year, specifically due to the expiration of the expanded child tax credits. That’s because Congress voted not to keep the expanded credits past December 31st, 2021.

“When taxpayers filed their 2021 tax return, some qualified for both the stimulus payment and the CTC/DCC, which helped them get bigger refunds,” Castelan explains. She then continues to add that those same taxpayers are expected the same amount to occur on their 2022 tax return which is no longer the case. “Others are not even aware that several tax credits have reverted to the pre-pandemic amount.”

One Family's Story

With this news, families across the country are now left scrambling, wondering why this wasn’t explained to them. Sarah*, a middle-class mom of three, heard there might be some upcoming changes but shared no one was entirely sure of what the change consisted of.

"I had seen some news articles indicating that the child tax credit would be much less this year, though there was a chance they might expand it again."

It’s true. The Atlantic even did a piece on how the news of the had seemingly glimpsed over the end of these credits and went on to something else. Any news that was shared was mainly how some on Capital Hill were still fighting to extend the credits but shared no outcome.

“I figured we would probably have a refund that would be much smaller, maybe only a few thousand dollars.”

Sarah’s family received a refund of $14,693 on their 2021 Federal Income Taxes that they had filed early last year.

When Sarah filed her taxes for 2022, she learned she would owe $500 in federal and get $400 back from the state. That's a swing of over $15,000 due to smaller tax credits.

“The biggest disappointment was seeing that my daycare tax credit which had been $8,000 in 2021, was going to be $1,200 in 2022, after we had had to pay out about $17,000 more this past year in childcare expenses."

In 2021, her family paid $20,260 for daycare. In 2022, they paid $37,510.

Sarah was hoping to pay off the $5,000 in credit card debt her family needed to make necessary car and home repairs. But instead, her family will, unfortunately, need to figure out a different way to cover them.

“I’m keenly aware that many other families are struggling much more than we are. But it was a shock going into filing taxes hoping to pay off some debt, and then I realized that we were going from an almost $15,000 refund last year to owing money this year,” Sarah shares, frustrated.

Many families are in the same situation.

Can Families Get Relief?

Castelan wants families to know that they may find some potential relief with a few tips. First, know that most of the tax credits are non-refundable. “This means families can’t claim the credits for more than the amount they owe,” Castelan explains.

She recommends that families track their withholding along with making any updates to make sure they are making the appropriate tax payments. “The IRS has a withholding tax calculator, which is user-friendly and easy to navigate,” she says. Formerly known as the Tax Withholding Estimator, this tool allows you to enter your information to help you determine if you are on track or behind on your taxes for the year.

Another way families can find relief is the refundable Earned Income Tax Credit which is up to $6,935. This credit is dependent on a variety of things, such as your filing status, the income received, and how many children and other dependents currently reside in your household. While Congress is in talks about expanding the CTC again, no one knows the outcome. “I encourage families to plan accordingly by tracking their finances and tax payments to avoid any tax bill surprises.”

Castelan’s last tip is for families with complex tax situations to talk to a tax professional with tax planning experience. “They will run a tax analysis based on the taxpayer’s info and provide them with tax strategies to minimize their tax liability and maximize tax credits and deductions they may be eligible for.” Even if you don’t have a complicated situation, talking to a tax professional so you can receive your max refund may be worth it.

*Sarah's name was changed for privacy.