The Tax Cuts and Jobs Act (TCJA) brought major changes to the child tax credit. For tax years 2018 through 2025, the credit is doubled from $1,000 to $2,000 per qualifying child. In addition, up to $1,400 of the credit is refundable.
What’s more, the income phase-out was expanded, which means more taxpayers will qualify for the credit. Married taxpayers filing a joint return will receive the maximum $2,000 credit per child up to $400,000 of adjusted gross income (AGI). At $440,000 of AGI, the credits are fully phased out. For single taxpayers, the phase-out begins at $200,000 of AGI and credits are no longer available after $240,000.
Who Is a Qualifying Child?
The qualifying child must be under age 17 at the end of the year (December 31st). The old rules for claiming dependents still apply. A child who qualified as a dependent in 2017 should qualify for the 2018 credit as long as he or she is still under age 17.
There also is a new nonrefundable $500 family credit for dependent children over age 17, dependent parents or other qualifying individuals.
Enhanced Credit Comes at a Price
It’s important to remember that while the child tax credit doubled, taxpayers are still losing the personal exemption. Before 2018 and passage of the new tax act, the personal exemption was scheduled to be $4,150 per person. A family with two children generally would have been eligible for a personal exemption deduction of $16,600. Under the new tax act, they’ll receive a $4,000 child tax credit instead. What’s the difference? A deduction reduces income subject to tax, while a credit is a dollar-for-dollar reduction in tax. If you owed the IRS $6,000 and have a $4,000 credit, the amount owed drops to $2,000.
If you have questions and need assistance navigating the new tax laws, please give us a call. We’re here to help.