Changes to Child Tax Credit & Exemptions Under TCJA

Changes to Child Tax Credit & Exemptions Under TCJA

Under the Tax Cuts & Jobs Act, every taxpayer with dependents and children will see changes in their return, and likely in their refund amount as well.  We have been sharing blogs with information about the changes affecting most taxpayers.  Click on these links to learn about Standard Deduction Vs. Itemization and Exemptions.

TCJA Child Tax Credit

Just like more people can use the standard deduction, now more people can get the child tax credit.  This is because under TCJA, the income limitations are increased.  Previously, if you were MFJ and earned more than $110,000, you couldn’t use the child tax credit, but now that limit is up to $400,000.

In addition to being available to more people, the credit is also doubled from $1,000 to $2,000 per qualifying child. Of that $2,000, only $1,400 can be refunded.  Click here to better understand the credit vs. refund for the child tax credit.

The child tax credit applies to qualifying children.  This means the dependent should be younger than 17.  They should be related to the taxpayer, live in your home for more than half of the year, and not provide more than half of their own support.  For dependents older than 17, there is a new $500 nonrefundable credit you can apply to reduce your tax liability.

Elimination of Exemptions

There are no longer personal exemptions.  Previously, you could claim an exemption for yourself, your spouse, and your dependents.  In 2018, One exemption was set to be worth $4,150. But this was before the standard deduction nearly doubled.

Whether the higher standard deduction offsets the loss of exemptions is dependent on the size of your family.  Here’s an example:

3 Personal Exemptions: If personal exemptions still existed and you had a spouse and one child, your total exemption would be $12,450.  The MFJ standard deduction of $24,000 more than covers this.

6 Personal Exemptions: On the other hand, if you have a spouse and 4 kids, your total exemption would have been $24,900 and now you’re out $900. But don’t forget – even though you’re out $900 , you can still apply the child tax credit, which may help even out the loss.

On the other hand, for taxpayers who have more itemized deductions than the standard deduction, the loss of personal exemptions will have a greater negative impact.

These calculations can be tricky when you have to consider so many moving pieces.  You can always ask you hb&k accountant to explain the child tax credit for your personal situation. We offer tax consulting to ensure you are taking advantage of the TCJA in the best way possible for you and your family.