If you’re a parent, or soon will be, you’re no doubt aware of how expensive it is to pay for your child’s food, clothes, activities and education. The federal child tax credit is available to help many taxpayers with children under the age of 17, as well as a dependent credit for those with older children who qualify.
TCJA Expands Credit
Before the Tax Cuts and Jobs Act (TCJA) kicked in for the 2018 tax year, the child tax credit was $1,000 per qualifying child. But it was reduced for eligible married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers). To the extent the $1,000-per-child credit exceeded a taxpayer’s tax liability, it resulted in a refund of up to 15% of earned income (wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s Social Security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.
Starting with the 2018 tax year, and applying through the 2025 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. If you’re eligible, it also allows a $500 credit (per dependent) for any of your dependents who aren’t qualifying children under 17. There’s no age limit for the $500 credit, but you must meet dependency tax tests. Under the TCJA, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned income threshold is decreased to $2,500 (from $3,000 under prior law), which has the potential to result in an even larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.
The TCJA also substantially increased the “phaseout” thresholds to qualify for the credit. Starting with the 2018 tax year, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the prior threshold of $110,000). The threshold is $200,000 single filers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.
Don’t miss out
The changes made by the TCJA generally increase the value of these credits and widen their availability to more taxpayers. Please contact us for further information or ask about it when we prepare your tax return.