Financial Planning Tax Policy

How Does Having a Kid Impact Your Taxes in 2018?

As a parent or perspective parent, make sure you take advantage of all the new tax law changes made in 2017!

In Summary:

  • 2018 enhanced child tax credit can save parents up to $2,000 per qualifying child.
  • Say goodbye to the dependency exemption in 2018.
  • Parents with higher income may receive more child tax breaks than in the past.
  • 529 plans expanded to cover K-12 private and religious education.

The Tax Cuts and Jobs Act passed by Congress back in December of 2017 has major impacts on several types of taxpayers – especially for those with kids or expecting to have kids in 2018.

To walk you through all of the changes I created this handy guide that breaks down all of the tax advantages of having a child in 2018. So although your bundle of joy might be keeping you up at night you can rest easy knowing you’re covered when it comes to your 2018 tax return.

The Enhanced Child Tax Credit

For 2018 the maximum child tax credit is temporarily increased from only $1,000 per qualifying child to $2,000 per qualifying child. If that wasn’t exciting enough the phaseout thresholds for those who qualify for the credit have been raised to $400,000 if married filing jointly and $200,000 for any other filing status.

In the past the child tax credit was limited if your modified adjusted gross income was above $110,000 if married filing jointly, $75,000 if filing as single, and $55,000 if married filing separately.

This means upper middle class families can claim a higher credit than in years past.

Although the maximum child tax credit is increased to $2,000 the maximum amount that may be refunded as an additional child tax credit is only increased from $1,000 to $1,400. Even though lower-income households will receive an increase in the child tax credit these families may not qualify for the maximum $2,000 credit.

Do you qualify for the credit? If you pass all 6 of the following requirements then you can receive the new enhanced credit.

  1. Age Test – To qualify, a child must have been under age 17 (age 16 or younger) at the end of 2018.
  2. Relationship Test – The qualifying 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 treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
  3. Support Test – In order to claim a child for this credit, the child must not have provided more than half of their own support.
  4. Dependent Test – You must claim the child as a dependent on your federal tax return.
  5. Citizenship Test – To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien. New for 2018: you must provide the child’s social security number to claim the credit.
  6. Residence Test – The child must have lived with you for more than half of 2018. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.

Taxpayers may also claim a $500 credit for each dependent who is not a qualifying child.

The Dependency Exemption is Out in 2018

For the 2018 tax year personal and dependency exemptions are gone! For 2017 the deduction amounted to $4,050 per qualifying person – this means a family of 4 will lose out on $16,200 of deductions.

To alleviate this blow congress doubled the standard deduction from $6,350 for the 2017 tax year to $12,000 in 2018 for individuals, and $12,700 to $24,000 for couples. Combine the increased standard deduction with lower tax rates and an enhanced child tax credit and most parents will find themselves ahead of last year.

Although the dependency exemption is gone for 2018 you will still use the old system to calculate your withholdings on your Form W-4.

The Internal Revenue Service released Notice 1036, which updates the income-tax withholding tables for 2018 reflecting changes made by the tax reform legislation enacted last year. This means your withholdings will automatically adjust based on the number of exemptions you are claiming on form W-4.

However, keep in mind that the updated withholding amounts are only estimates and do not reflect the actual changes on your 2018 tax return. To ensure your new withholding amounts are correct consult with your tax advisor.

Expanded 529 Plans for K-12 Private and Religious Education.

A 529 plan is one of the more popular savings vehicles when planning for your child’s education expenses. The program initially started as a pre-paid tuition plan and was made official by the Small Business and Job Protection Act in 1996.

Two years after the passage of the bill, the IRS issued guidelines for these tuition plans under Code Section 529 – hence the name 529 plans.

Fast forward to 2018 and the 529 plan is a widely used investment tool by parents all across the country. Why? Well, any monies, including investment growth, used for qualifying expenses for the named beneficiary is distributed tax-free!

Since a sizable portion of the funds in these investments are growth, parents are able to save thousands of dollars by avoiding unnecessary tax. These funds can be used on qualified expenses including tuition, fees, books, required supplies, computers and other related expenses tax-free! The 529 plans can even cover limited room and board costs.

For 2018 the rules on the 529 plan are expanded to cover the cost of K-12 private and religious education. This is great for parents who send their kids to expensive private high-schools who’s tuition rivals that of major 4 year higher education institutions.

Consult With Your Tax Advisor

To ensure you’re benefiting from all the tax savings that comes with parenthood make sure to consult a tax advisor. The tax code is complicated and there are many rules and exemptions to the rules that make every parent’s situation different.

To see how the new legislation will impact your return in 2018 make sure to consult with your tax advisor.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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