While many aspects of the current tax reform bill are controversial, one of the most talked about part of the Tax Cut & Jobs Act also know as the Trump tax breaks is the Child Tax Credit provision. Married couples everywhere delighted with the announced increase in the child tax credit for 2018. This is the credit that taxpayers receive if you have a dependent child aged 17 or younger. The credit was doubled from $1,000 to $2,000 per child.
In addition to this increase the refundable portion of the credit was also increased. That is of major significance when considering all the tax credits and deductions a typical married couple with children can take advantage of.
If you have children, here’s what you need to know about the changes made to the Child Tax Credit for the 2018 tax year and how they could affect you.
The Child Tax Credit is available to be claimed for qualified children under age 17; you can claim it for all your qualifying children in a given tax year. To be clear, the child must be under 17 at the end of the year to claim the credit.
Get the Credit: Qualifying Children
A qualifying child for this credit must meet all the following criteria:
- The child must be under age 17 – age 16 or younger – at the end of the tax year.
- The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always considered your own child.
- The child must not have provided more than half of their own support.
- You must claim the child as a dependent on your federal tax return.
- The child must be a U.S. citizen, U.S. national, or U.S. resident alien and you must provide a valid Social Security number (SSN) for the child by the tax return due date.
- The child must have lived with you for more than half of the tax year (some exceptions apply).
Not a tax deduction!
It’s also important to emphasize that this is a credit, not a tax deduction. While a deduction reduces the amount of your income that is subject to tax, a credit reduces your tax bill dollar-for-dollar. If you owe the IRS $5,000 for the year, and have a $2,000 tax credit, your tax bill drops to $3,000.
What’s better than a refund?
Another important distinction when it comes to tax credits is refundable versus nonrefundable credits. A nonrefundable credit can be used to reduce a taxpayer’s bill all the way down to zero. On the other hand, a refundable tax credit can be given even if a taxpayer ends up with no tax liability at all. If your calculated tax for the year is $1,000, and you have $1,500 in refundable tax credits to claim, you can reduce your tax bill to zero and get back that extra $500.
In a nutshell, refundable tax credits are vital, especially for lower-income Americans. However, the refundable portion of the credit is capped at 15% of your earned income more than $4,500. This effectively means that if your earned income is greater than $13,833, your refundable credit amount is only capped by the $1,400 limit, and if it is less, the refundable portion of the credit can be reduced.
Another big change to the Child Tax Credit for 2018 involves the income qualifications. In previous tax years, the credit has only been available for low- to middle-income households. For instance, the credit began to disappear in 2017 for married couples who earned more than $110,000 and for single filers with AGI above $75,000.
In 2018, the credit will be available to far more households, thanks to a massive raise in the phase-out thresholds. Here’s a quick guide to the Child Tax Credit phase-out thresholds for 2018.
| Tax Filing Status | Maximum AGI for Full Credit | AGI Where Credit Disappears |
| Single | $200,000 | Over $240,000 |
| Married filing jointly | $400,000 | Over $440,000 |
| Head of household | $200,000 | Over $240,000 |
| Married filing separately | $200,000 | Over $240,000 |
DATA SOURCE: GOP TAX REFORM BILL. 2017
If your income falls between the two income thresholds for your filing status, you can still claim a partial credit. Each Child Tax Credit you qualify for will be reduced by $50 for every $1,000 your modified adjusted gross income (MAGI) exceeds the lower threshold.
A smaller credit for other dependents
The tax reform bill also includes a nonrefundable $500 “family credit” for other dependents. Examples might include an aging parent who depends on you for care or a child to whom you provide support is 17 years old or older.
In order to claim the credit, you must file a federal form 1040, federal form 1040A, or a federal form 1040NR. You cannot claim the child tax credit using form 1040-EZ.
The modified credit is slated to remain in place for the 2018 through 2025 tax years.
Bottom line: the new tax code is complex and cumbersome for business. To navigate the new legislation, you need trusted experts and advisors who understand the nuances of accounting. We are here for you! Visit us at TYSLLP.com.