Child Tax Credit Changes Under the TCJA

Child Tax Credit Changes Under the TCJA

A major change with the Tax Cuts & Jobs Act (TCJA) involves the child tax credit. Over the years, the child tax credit has changed and now, with the newest tax update, the changes affect more people than ever before.

The child tax credit was first available for use in 1998. At that time, it was a simple credit of $400 for each qualifying child under the age of 17. We’ve come a long way from that point. Now there are nonrefundable and refundable credits, phase-out limits, and different amounts for different types of dependents. Let’s go through the current tax law.

TCJA Child Tax Credit

Qualifying Child: The Child Tax Credit is available for qualifying children under the age of 17. To be a “qualifying child” the following should be true:

  • The child should be 17 at the end of the year in order to claim the credit. So, if you have a child who turns 18 years old on December 1, 2018, unfortunately, this credit won’t apply to them.
  • The child is related to the taxpayer (son, daughter, grandchild).
  • The child has a valid Social Security Number.
  • The child must live in the taxpayers’ home more than half of the year.
  • The child must not provide more than half of his/her own support.

Nonrefundable Credit: The credit doubles the Child Tax Credit from $1,000 to $2,000 per qualifying child. If you have 4 children under the age of 17, your credit is $8,000. But, key word here is that this $2,000 per child is a credit, not a refund. Although most of the credit is refundable (see next section), when we say there is a $2,000 credit, that means you can subtract that amount from what you owe.

  • For example, if you have one 15 year old child and you owe $3,000 in taxes, you can apply the child tax credit and then you will owe $1,000.

What about the Refund?

This is where your taxes can get a little tricky. $1,400 of the Child Tax Credit is a refundable credit for each qualifying child. A refundable credit means first, the credit is applied to what you might owe, and then any leftover money is refunded to you.

  • For example, if one 15 year old child and you owe $1,000 in taxes, you can apply the child tax credit and then you will be refunded $400.

This refundable portion of the credit equals 15% of your earned income in excess of $2,500. Meaning you will need earned income of approximately $12,000 a year to qualify for and receive the full refund.

No Personal Exemptions: Previously, for every child you had, you could claim a personal exemption and the Child Tax Credit, but that is no longer the case under TCJA. The personal exemption now only applies to the filer(s) of the return.

Phaseout Thresholds: Previously, the Child Tax Credit was restricted and many higher income earners could not use the credit. Under the TCJA, the phaseout threshold has increased to $400,000 for joint filers and $200,000 for single filers. 

TJCA Dependent Credit

One more small credit worth knowing about a nonrefundable $500 credit for other dependents. If you provide support for a child over the age of 17 or for an elderly family member, you can apply the $500 to reduce your tax liability. The phaseout for using this credit is the same as the phaseout for the Child Tax Credit.

As you can tell, the new tax law has many complex changes. We hope this helped simplify the Child Tax Credit for you.  If you have any questions, contact us at hb&k!