The child tax credit received some big changes as a result of tax reform.
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The “TAX CUTS AND JOBS ACT OF 2017” made significant changes to the Child Tax Credit.
In summary, the tax bill that was signed by the President back in December of 2017 did make a lot of changes to the Child Tax Credit. So, for those that are not familiar with the Child Tax Credit, this credit is available either to the parents or guardians of qualified children as long as your child is under the age of 17 and is a dependent on your return.
Under the new rules, parents and guardians are allowed a $2,000 tax credit per qualifying child. So once again; any child under the age of 17 that is claimed as a dependent on your return. Now, if we compare that to last year, 2017, that credit was only $1,000. They doubled the credit.
They have also increased who can get the credit. In 2017, there were relatively low income limits for those that would qualify for the credit. In 2017, it was actually $110,000 for a married couple filing a joint return. But for this year, starting in 2018, that phase out limit is actually $400,000 for a married couple filing a joint return, and $200,000 for a single person or for somebody that is filing as head-of-household. Therefore, it has really increased the possibilities of who can get the credit, along with the size of the credit.
The other credit that they added was a $500 credit for other dependents. Whether that other dependent be a parent, a grandchild, or somebody else that is claimed as a dependent on your return, this may make you eligible for a $500 tax credit for those individuals. The one question that is still out there is whether children over the age of 17 who don’t qualify for the $2,000 credit would qualify for the $500 credit. It looks like they probably will, but there is nothing solid out there at this point that they absolutely will. We will have to wait on that, and that should become clear as the Regulations come out as the year progresses.
In summary, 1986 was the first year that they started requiring social security numbers for dependents on their parent’s returns. So, in 1986 there were a lot of dependents that may not have necessarily actually been dependents. Thus, in 1987 there were 7 million fewer dependents that were claimed. What this means is that people’s dogs, cats, and even gerbils that were claimed as dependents in 1986, were not dependents in 1987.
SO THIS IS A CREDIT – NOT A DEDUCTION?
Yes. Say someone had $5,000 worth of federal tax that they owed, and they had a qualifying child. That $2,000 credit actually reduces the tax that they are going to owe from $5,000 down to $3,000. So yes, it is actually a credit– which is much better than a deduction.
WHAT HAPPENS IF THE CREDIT REDUCED MY TAX TO ZERO, DO I GET ANY ADDITIONAL BENEFITS?
That’s going to allow me to use my favorite word – “maybe.” Like anything in the tax laws, it’s all facts and circumstances. However, one of the changes that they made toward the end of the process was to make a certain portion of it refundable. At the end of the day they decided that $1,400 per child would be refundable, but only if you fit within some guidelines. That guideline is that you had to have other earned income in order to qualify. So the rules say that you are limited to 15% of earned income above $4,500. This means that if you have, as a married couple, $13,800 worth of earned income on your tax return, you will be allowed a full refundable portion for the one child that you take as a dependent. You can have the refundable portion for more, but the $13,800 pretty much guarantees that you are going to get the full refundable portion for at least one child. When you think of earned income, it’s not interest, it’s not dividends, and it’s not social security or pension income. Earned income includes wages earned from your job, small business income that is usually reported on a Schedule C; it is partnership income, and it is even farm income for farmers. So these are the items that would be considered to be earned income for these purposes.
Most of the time there are winners and losers when it comes to tax law changes. However, this one appears to be a win-win. The credit has increased from $1,000 to $2,000, the phase-out limit went up from $100,000 to $400,000, and the refundable portion is larger than it was before which helps lower income. So it seems like a win-win situation for all.