Titanic shifts in the United States tax code continue to rock American taxpayers. Under the Tax Cuts & Jobs Act of 2017 (TCJA) divorced parents, separated spouses and unmarried parents may now be unable to fight over their children’s dependency exemptions in 2018 because lawmakers have eliminated the exemption.
In 2017, the U.S. Congress passed a new tax law that eliminates the dependency exemption for children, one of the tax benefits that historically provoked intense debate between estranged parents. The new law went into effect on January 1, 2018 but does not affect 2017 tax returns.
In place of a dependency exemption for each child, which is reduced to $0 in 2018, the new federal tax law raises the standard deduction to $12,000 for parents who are single or married filing separately; $18,000 for heads of household; and $24,000 for parents who file joint tax returns. The standard deduction is available to parents, regardless of how many children they have, who do not itemize their deductions on their tax returns. The child tax credit is also increased, for those who are eligible 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.
Here are the other five six IRS tests:
Age Test: The child you claim as your dependent must have been under age 17 (so, 16 or younger) at the end of the tax year.
Support Test: The child must not have provided more than half of their own “support,” meaning the money they use for living expenses.
Dependent Test: The child must be claimed as your dependent on your federal income tax return.
Citizenship Test: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
Resident Test: The child must have lived with you for more than half of the tax year (with a few exceptions detailed on the Child Tax Credit worksheet).
All changes to the new Child Tax Credit expire after December 31, 2025.
Finally, taxpayers should note that the standard deduction is still available to parents, regardless of how many children they have, who do not itemize their deductions on their tax returns. However, parents who claim itemized deductions will not get to use the enhanced standard deduction. There are several tests, but if you meet the requirements, you can claim an exemption for a dependent on your return and the child tax credit for that dependent.
Ask your trusted advisor at TYSLLP.com for help to thoroughly understand these tax changes and more. We are here for you! Help is a phone call away. Contact us 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.
Family Law Tax Alert
H & R Block Online
The Internal Revenue Service online