NJ boosts child tax credits

JOHN REITMEYER, BUDGET/FINANCE WRITER | DECEMBER 14, 2021

NJ Spotlight News

While tax season is still several months away, a recently enacted state law is triggering big changes for a tax credit that can help offset child care expenses for thousands of New Jersey families.

For starters, the new law has more than doubled the amount of money that taxpayers can earn annually in New Jersey while remaining eligible for the state’s child and dependent care tax credit.

The increase, from $60,000 to $150,000, will mean an estimated 80,000 more families will be eligible for the tax credit, starting with the current, 2021 tax year.

Meanwhile, another policy change enacted by Gov. Phil Murphy and lawmakers earlier this month will turn the tax break into a “refundable” credit, something that will let taxpayers begin to claim the full credit they are eligible for, even if the size of their credit is worth more than their total tax liability.

Those changes and others drew bipartisan support while moving through the Legislature in recent weeks, and they have been widely praised by business groups and other advocates in Trenton.

NJ’s affordability

The expanded law could also help ease some of the concerns about New Jersey’s affordability, which Democratic legislative leaders have promised to take more seriously. That promise came after the November elections where Republicans gained in both houses, and Murphy, a Democrat, barely held off GOP challenger Jack Ciattarelli’s bid to make him a one-term governor.

Established in 2018, the state child and dependent care tax credit piggybacks off a similar federal tax break that allows taxpayers to receive a credit for expenses they incur while caring for qualified children or adult dependents.

In New Jersey, taxpayers can receive a state credit worth as much as 50% of the federal credit, depending on their annual income. Before the recent policy changes, an estimated 70,000 New Jersey taxpayers were qualified to receive the credits, according to the state Division of Taxation. Up to 80,000 more are expected to qualify under the new law, according to legislative estimates.

Under current law, the state tax credits can be provided to those who care for a “child under age 13 or a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.”

The proposal to expand the group eligible for the state credit by increasing the total amount of income that can be earned annually was first included in a budget plan Murphy unveiled in March. Funding for the expansion was also incorporated into the $46.4 billion spending bill that lawmakers approved in late June, according to Department of Treasury officials.

Delayed by election prep

But the new income limit could not be officially enacted until lawmakers passed a separate piece of legislation, the officials said. This year, lawmakers took the summer months off in the run-up to the November elections, delaying for several months the formal introduction of that legislation.

The same legislation also called for turning the tax credit — which previously was provided as a nonrefundable state tax break — into a fully refundable credit. That policy change will allow some taxpayers to begin receiving a cash refund if the credit for which they are eligible is in excess of their gross income tax liability, putting lower-income taxpayers who qualify for the credit on par with those with larger tax liabilities.

The legislation also lifted caps that were in place for employment-related expenses, which were $500 for one child or dependent and $1,000 for two or more children or dependents.

A fiscal note compiled by the nonpartisan Office of Legislative Services estimated the cost of funding the expanded state tax credit would rise from $17.2 million to $76.2 million annually, at least initially. Policy changes under discussion in Washington, D.C., including whether to maintain an increased federal credit beyond this year, could impact the size of the state tax credit in future tax years.

Despite this year’s delay in passing the tax-credit changes that were funded in the fiscal year 2022 budget, since the changes begin with the 2021 tax year, they were enacted by Murphy well in advance of the upcoming tax season.

“The goal was always to make sure this was enacted before the start of the 2021 tax season in order for its impact to be felt,” Treasury spokeswoman Danielle Currie said.

High price of child care

In New Jersey, the cost of child care can rival or even top the price tag for a year of college tuition, said Assembly Speaker Craig Coughlin (D-Middlesex) in a statement issued after the tax-credit expansion passed by the Legislature earlier this month.

The expanded tax credit will “provide the needed breathing room to help families afford child care, reflecting our commitment to meaningfully support our working families and to tackling affordability,” Coughlin said.

In addition to helping individual taxpayers and families, the tax-credit expansion could also provide a lift to the businesses in New Jersey that provide child care services, including those that have been hit hard during the ongoing coronavirus pandemic.

Alexis Bailey, director of government affairs at the New Jersey Business & Industry Association, said the policy changes will “help improve access to childcare, which will help the industry and an entire workforce that relies on childcare.”

“Many childcare businesses have closed their doors and others struggle to stay afloat,” Bailey said. “Tax credits that can be provided families to assist with childcare expenses will also help support these small businesses and enhance their ability to remain open.”

Murphy also referred to the health crisis in a statement issued at the same time he announced the law expanding the child-care tax credit had been formally enacted.

“This (law) will help ensure affordable access to childcare, a critical part of getting hardworking New Jerseyans back into the workforce and reversing the ‘she-cession’ caused by the pandemic,” Murphy said.

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published this page in News and Politics 2021-12-14 03:17:00 -0800