The new tax laws for 2018 will bring sweeping changes for both individuals and businesses. In an effort to protect families from tax hikes, Congress added an enhanced child tax credit which looks to significantly reduce the tax burden for middle-income and lower-income individuals with children. This article will detail the child tax credit for 2017 and how the law will change in 2018.

2017 Child Tax Credit

For 2017, an individual may claim a tax credit for each qualifying child under 17. The amount of the credit is $1,000 for each qualifying child.

The total amount of the credit is reduced for higher income taxpayers. The credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income in excess of $75,000 for individuals and $110,000 for couples filing jointly. There is an obvious marriage penalty in the existing law because a single parent making $75,000 would receive a higher credit than two individuals making a combined income of $150,000 ($75,000 each).

The credit can reduce both regular tax and the alternative minimum tax (AMT) to zero and a refundable portion is allowed for the lesser of 15% of earned income in excess of $3,000 or the allowed child tax credit. The refundable portion is called the additional child tax credit and allows the taxpayer to receive funds in excess of all the federal income taxes they paid throughout the year.

2018 Enhanced Child Tax Credit

For 2018, an individual may claim $2,000 per qualifying child – an increase of $1,000 per qualifying child. Additionally, the maximum refundable portion of the child tax credit is increased from $1,000 to $1,400 per qualifying child.

The dollar amount of the credit is not the only thing that has been expanded under the new law. The phaseout for the expanded child credit is increased from $75,000 in modified adjusted gross income to $200,000 for single filers and $400,000 for joint filers (eliminating the marriage penalty). This is a great news for married couples with children who have household income in excess of $110,000.

Elimination of Dependent Exemptions

The new tax changes will eliminate the personal exemptions which might negate the tax savings of the enhanced child tax credit. The personal exemption for 2017 is $4,050 per dependent which means parents will no longer be able to deduct $4,050 per child from their taxable income.

Given a marginal tax rate of 25%, the loss of the dependent exemption means a loss of $1,012 ($4,050 x .25 = $1,012). However, the new tax changes lowers tax rates and expands the tax brackets so that more income is taxed at lower rates. This means that it’s impossible to have an apple to apple comparison because so many provisions are changing within the tax law that it makes it difficult to measure the overall impact of one change.

Consult With a Tax Advisor

To see exactly how these changes will impact you specifically, consult with a tax advisor. Changes in itemized deductions, personal exemptions, child tax credits, and other deductions can significantly change your specific tax situation. For a more in-depth analysis, consult a tax advisor.

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