Titanic shifts in the United States tax code continue to rock American taxpayers.
Under the Tax Cuts & Jobs Act of 2017 (TCJA), divorced, separated, or unmarried parents can no longer contest who claims their children’s dependency exemptions. This is because lawmakers completely eliminated the exemption, reducing it to $0 starting in the 2018 tax year.
Passed by Congress in 2017, this tax law took effect on January 1, 2018 (meaning it did not impact 2017 tax returns). By zeroing out the dependency exemption, the law effectively removed a tax benefit that had historically been a major source of intense debate between estranged parents.
Compensating with Higher Standard Deductions and Credits
To replace the child dependency exemptions, the federal law increased the standard deduction for taxpayers who do not itemize, regardless of how many children they have. The revised standard deduction amounts became:
Single or Married Filing Separately: $12,000
Head of Household: $18,000
Married Filing Jointly: $24,000
Additionally, the law increased the Child Tax Credit for parents who meet the eligibility requirements to claim it.
Tax credit changes
Under the new Tax Cuts and Jobs Act (TCJA) the following child tax credit changes will take place in 2018:
* The Child Tax Credit under 2018 tax reform is worth up to $2,000 per qualifying child. The age cut-off remains at 17 (the child must be under 17 at the end of the year for taxpayers to claim the credit).
* The refundable portion of the credit is limited to $1,400. This amount will be adjusted for inflation after 2018.
* The earned income threshold for the refundable credit is lowered to $2,500.
The beginning credit phaseout for the CTC increases to $200,000 ($400,000 for joint filers). The phaseout also applies to the new family tax credit.
The child must have a valid SSN to claim the nonrefundable and refundable credit.
Prior to the TCJA, the taxpayer who was eligible to claim the child’s dependent exemption was also the one eligible to claim the CTC. In turn, the taxpayer and child had to meet several “tests” for the one to be considered the dependent of the other.
While the new tax law eliminates the dependent exemption itself – again, it is now 0, it retains the definition of dependent to claim the CTC and other child- or dependent-related tax benefits. For Child Tax Credit reform purposes, this will usually mean that the child must be related to the taxpayer in one of several ways. They are proven to be either a son, daughter, adopted child, foster child grandchild, or other blood relative.
Child Tax Credit Eligibility Requirements:
To qualify, a child must meet these five additional IRS criteria:
- Age Test: The child must be under the age of 17 (16 or younger) at the end of the tax year.
- Support Test: The child cannot provide more than half of their own financial support for living expenses.
- Dependent Test: You must claim the child as a dependent on your federal income tax return.
- Citizenship Test: The child must be a U.S. citizen, U.S. national, or U.S. resident alien.
- Resident Test: The child must live with you for more than half of the tax year (subject to specific exceptions outlined on the Child Tax Credit worksheet).
All modifications to the new Child Tax Credit are set to expire after December 31, 2025.
Standard Deductions and Exemptions
Parents who do not itemize can still utilize the standard deduction, regardless of how many children they have. However, parents who choose to itemize their deductions cannot use the enhanced standard deduction. If you satisfy all of these various requirements, you can claim both a dependent exemption and the child tax credit for that dependent on your return.
Get Expert Guidance
Because recent tax law changes mean tax preparation will take longer this year, it is best to start organizing your documents as soon as possible.
For help thoroughly understanding these updates, contact your trusted advisor at TYSLLP.com. We are here to assist you—expert help is just a phone call away at 925-498-6200.
Taxpayers should be aware that with the new changes in the tax law, tax preparation will take longer. Get started as soon as possible to get organized.
If you are not sure where you land on this or any other tax question, contact us at https://tysllp.com/contact-us/
Sources:
Pittsburgh Magazine
http://www.pittsburghmagazine.com/Pittsburgh-Magazine/March-2018/New-Tax-Law-Eliminates-Child-Tax-Exemption-for-Parents/
The Internal Revenue Service online
www.IRS.gov
Smart Asset
https://smartasset.com/taxes/all-about-child-tax-credits
The Internal Revenue Service online
www.IRS.gov
Smart Asset
https://smartasset.com/taxes/all-about-child-tax-credits