Hello to all our Chinese friends living in Austin! You may have recently noticed that the Internal Revenue Service (IRS) has released its annual inflation adjustment announcement (Rev. Proc. 2025-32). For many of our families with children, the most important thing is the changes on the tax side. Under current rules, starting with the 2025 tax year, eligible parents can claim a Child Tax Credit (CTC) of up to $2,200 per child — an amount raised by the One Big Beautiful Bill Act (OBBBA) from $2,000 in the 2024 tax year, and which remains unchanged for the 2026 tax year. Although this news may sound like just a minor numerical tweak, it actually has very real implications for family financial planning.
The Close Relationship Between Inflation and Tax Adjustments
You may be wondering why the IRS adjusts these figures every year. This is done to offset the effects of inflation. As prices and costs rise, if the amount of a tax credit stays the same, the real "purchasing power" that taxpayers actually receive would decline. As an Austin Chinese CPA firm serving the Austin community, we are keenly aware of the rising cost of living in Austin in recent years, especially expenses related to raising and educating children. Therefore, this annual adjustment by the IRS is designed to ensure that the tax benefits available to families with children are not eroded by inflation, so that this credit can more meaningfully ease everyone's burden.
According to the IRS's annual inflation adjustment announcement (Rev. Proc. 2025-32), this type of adjustment is part of the IRS's routine revision of various tax items. For the 2025 tax year (the return most people will file in 2026), each qualifying child can receive a credit of up to $2,200, and the related phase-out income thresholds continue to apply. This is not simply an increase in benefits, but a legally mandated mechanism to ensure tax fairness.
What Is the Child Tax Credit (CTC)?
Before diving into the numbers, let's review what the CTC actually is. Simply put, the Child Tax Credit is an amount that can be used directly to reduce the federal income tax you owe. This is different from a "deduction," which reduces your taxable income — a credit is subtracted directly from your tax bill, so it is generally worth more.
Under current rules, the credit is capped at $2,200 per qualifying child. More importantly, the "refundable" portion of the credit — known as the Additional Child Tax Credit (ACTC) — is capped at $1,700. This is especially important for low- and middle-income families, because "refundable" means that even if the federal tax you owe has already been reduced to zero, the IRS will still send you the remaining credit amount (up to the $1,700 cap) directly as a refund. That's real cash in hand! If you'd like to learn more about the differences between various tax deductions and credits, we invite you to read our past Tax Insights column.
The Specific Impact of This Update on Chinese Families
For Chinese families living in Austin, Texas, although we don't need to pay state personal income tax, federal taxes remain a top priority in our financial planning. The increase in the CTC amount means that families with multiple children may receive a larger refund when filing their taxes.
However, it's important to note that the CTC is subject to income limits. As the credit amount is adjusted for inflation, the income thresholds for claiming the credit change accordingly. If your income exceeds this threshold, the credit you're entitled to will gradually phase out until it's eliminated entirely. This means that when doing annual tax planning, we must calculate precisely. For example, if you're a dual-income (W-2 employee) household, or if you're self-employed, reasonably adjusting your income structure or making use of qualified retirement accounts (such as a 401(k) or SEP IRA) to adjust your Adjusted Gross Income (AGI) may help you make better use of this credit.
How Can You Make Sure You Receive This Money?
The most basic requirement for claiming this credit of up to $2,200 is that the child must have a Social Security Number (SSN). This is an important reminder for families who have recently arrived in the U.S. and whose children's immigration status is still pending. In addition, you must show that the child lived with you for more than half of the tax year, and that you provided at least half of the child's financial support.
Many of our clients who come to us for Chinese tax filing in Austin often ask: if I'm a separated parent, who can claim this credit? Generally, only the custodial parent with whom the child lived for more than half of the tax year can claim the credit, or the non-custodial parent may claim it if the custodial parent signs a "Release of Claim." However, the rules are quite complex and require guidance from a professional accountant.
YZ CPA Note
Although the IRS has updated the credit amount, the details of tax regulations remain complicated. This is especially true for high-income families or families whose income is near a "cliff" threshold — filing carelessly could cause you to lose eligibility for the credit. We recommend that everyone gather the relevant documentation for dependent care expenses and children's identification before the end of this year. In addition, if you hold assets overseas — for example, an account opened abroad for your children's education — don't forget to also pay attention to FBAR and other compliance requirements when filing your taxes. For details, please refer to our FBAR Filing Guide, so as not to jeopardize your overall tax compliance for the sake of a small oversight.
In summary, this update from the IRS is good news for families with children. However, turning this policy benefit into maximum real cash flow for your family still requires careful tax planning tailored to each family's specific circumstances.
If you need professional tax assistance, please visit our YZ CPA Services page or contact us.