Highlights

• Child tax credit is increased from $1,000 per qualifying child to $2,000 per qualifying child.
• Phaseout threshold increased to $400,000 if married filing jointly and $200,000 for any other filing status (which is an increase from $110,000 if married filing jointly, $75,000 if filing as single, and $55,000 if married filing separately).
• Taxpayers may claim a $500 credit for each dependent who is not a qualifying child.

The child tax credit is doubling in 2018 – do you know how it will impact your tax return? With the passage of the Tax Cuts and Jobs Act comes an expanded child tax credit. The credit not only doubles but is also expanded for higher income taxpayers who wouldn’t otherwise qualify for the credit. This article will describe the 2018 changes and how they differ from 2017.

Historical Context

Enacted in 1997, the child tax credit was intended to assist working class families by offsetting the cost of raising children. Since then the child tax credit has been expanded and is worth $1,000 per qualifying child.

To assist lower-income households, the tax credit was made refundable with the implementation of the Additional Child Tax Credit (ACTC)- meaning the credit can be taken even if the taxpayer has no tax liability. For 2017, low-income households can receive a refundable child tax credit equal to 15% of their income over $3,000 (up to the total $1,000 credit). For example, a single mom with one child earning $20,000 a year would receive the $1,000 tax credit as a refund on top of any other refund they would be entitled to receive.

The child tax credit also ties into the earned income credit which helps working class families pay for the cost of raising children. The maximum credit for 2017 is $6,381 for taxpayers with three or more qualifying children. This means that low-income households with three children can claim a maximum credit of up to $9,381 when combining the child tax credit and the earned income credit.

2017 Child Tax Credit

For 2017 the child tax credit remains at $1,000 per qualifying child. A qualifying child is anyone you can claim as a dependent who is under the age of 17 by the end of the tax year.

The child tax credit phases out for taxpayers with Modified Adjusted Gross Income (MAGI) above $110,000 if married filing jointly, $75,000 if filing as single, and $55,000 if married filing separately. The credit is reduced by $50 for each $1,000, or fraction thereof, of MAGI over these thresholds.

The child tax credit is technically nonrefundable – however, any unused portion of the credit may be refunded as an Additional Child Tax Credit (ACTC). This amount is equal to the lesser of the unused portion of the credit or 15% of a taxpayer’s earned income in excess of $3,000.

For example, a taxpayer has a computed tax of $500 without considering the child tax credit. He is single earning $40,000 and has 2 children. The amount of the child tax credit he may use is $500 to eliminate the computed tax on the return. The $1,500 unused portion of the child tax credit may be refunded as an additional child tax credit. His earned income in excess of $3,000 is $37,000 ($40,000 – $3,000 = $37,000)  and 15% of $37,000 is $5,550. He will claim the lesser of the unused credit ($1,500) or 15% of his earned income in excess of $3,000 ($5,550). Therefore he would be entitled to a $1,500 additional child tax credit as a refund. Additionally, since he has no tax liability he would receive a refund of any federal tax withheld during the taxable year.

2018 Child Tax Credit

The child tax credit is temporarily increased from $1,000 per qualifying child to $2,000 per qualifying child. Additionally, the phaseout thresholds have been increased to $400,000 if married filing jointly and $200,000 for any other filing status (which is an increase from $110,000 if married filing jointly, $75,000 if filing as single, and $55,000 if married filing separately).

Taxpayers may claim a $500 credit for each dependent who is not a qualifying child. Although the dependency exemption is eliminated in 2018, the qualifications for the $500 credit fall under the qualifying relative definition.

The maximum amount that may be refunded as an additional child tax credit is increased from $1,000 to $1,400. The 15% of earned income over a specified dollar amount is still in effect but the amount is reduced from $3,000 to $2,500.

To claim the child tax credit a social security number must be entered on the return. Previously, only a Taxpayer Identification Number (TIN) was needed. If the child does not have a social security number then the $500 credit may be taken.

Biggest Winners

Taxpayers with the most to gain from the enhanced child tax credit is higher income households. In 2017, a couple filing a joint return with 3 kids earning $300,000 wouldn’t be able to take a child tax credit. Additionally, if they fall under the alternative minimum tax (AMT) then they would lose their personal exemptions as well.

This meant that households with moderately high incomes wouldn’t get any benefit from claiming their children on their return.

In 2018, however, the increase of the phaseout from $110,000 to $400,000 means that this family of 5 would be able to claim $6,000 in additional credits. Although the dependency exemption is eliminated they wouldn’t have benefited from the deduction anyway due to the AMT.

Couple this with reduced tax rates and this same family may see a significant drop in their tax liability in 2018.

Each tax situation is different, however, and to see how the changes in the child tax credit may impact your return consult with a trusted tax advisor.

This article is intended for educational purposes only and should not be relied upon as tax, legal financial or other paid financial services. Consult with an advisor about how the information provided may impact your specific situation.
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