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How New Tax Reform Affects the Child Tax Credit

Stephen Fishman
Tax expert and contributor MileIQ

If you're a parent or have dependents, you need to know about the child tax credit. It can save you thousands of dollars on your taxes. Moreover, as a result of tax reform, far more people can get this credit than ever before.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction in the amount of income tax you must pay. For example, a $1,000 credit reduces your income taxes by $1,000. Credits are much better than tax deductions, which only reduce how much of your income is subject to income tax.

What is the child tax credit?

The child tax credit is a tax credit for parents and nonparents with "qualifying children" that they support. It's intended to help them bear the costs of raising children.

Who qualifies for the child tax credit?

To qualify for the child tax credit, the following must be true:

  • You are not claimed as a dependent by another taxpayer
  • You have one or more "qualifying children" and
  • Your income is not too high – the credit phases out for high-income taxpayers

What is a qualifying child?

To be a qualifying child, a child must meet six simple tests:

  • Age Test: The child must be under 17 years of age (16 or younger) at the end of the tax year.
  • Relationship Test: The child must be your daughter, son, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, half sister or half brother. The child can also be the direct descendant of any of these – for example, your grandchild, niece or nephew.
  • Dependent test: You must claim the child as a dependent on your tax return.
  • Support Test: The child must not pay for more than half of his or her own living expenses. The child also cannot file a joint return for the year.
  • Resident Test: The child must have lived with you for more than half of the tax year. Temporary absences due to things like illness, business, education, vacation, or education don't count. This goes for both you and your qualifying children.
  • Citizenship Test: The child must be a U.S. citizen, a U.S. national, or a U.S. resident alien. An adopted child gets U.S. citizen treatment if you are a citizen or national and the child lived with you the entire year.

The child must also have a valid Social Security Number. You need to get this by the due date of your tax return. The due date is April 15, or October 15 if you obtain an automatic extension to file your return.  The IRS has an online interview you can complete to see if you have a qualifying child for the child tax credit.

What if my dependent doesn't meet the qualifications?

If you have a child or other dependent who can't meet all these requirements, you could qualify for a new $500 "credit for other dependents" For example, you could get the $500 credit if you have a child you support who is over 16 or who lacks a social security number. See the Child Tax Credit Worksheet in the Form 1040 instructions.

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How much is the child tax credit?

The maximum child tax credit is $2,000 per qualifying child. For example, if you have two children, your maximum credit is $4,000. But the credit amount phases out for high-income taxpayers.

How is the credit phased out for high-income taxpayers?

Most people with qualifying children get the maximum $2,000 credit. However, the credit phases out for high-income people. The phase-out begins if your adjusted gross income (AGI) is over:

  • $200,000 if you are filing singly or as a head of household, or
  • $400,000 if you are married filing a joint return

You calculate the phase-out on a credit-by-credit basis. Each $2,000 credit per child is phased out by $50 for every $1,000 your AGI exceeds the thresholds. For example, if a married couple has one child and their AGI is $420,000, they'll qualify for one $1,000 credit. If they have two children, they would qualify for one $1,000 credit and one full $2,000 credit.  One $2,000 credit is completely lost if your AGI exceeds the applicable threshold by $40,000. For example, a married couple filing jointly loses one credit if their AGI exceeds $440,000. They lose two credits if their income exceeds $480,000, and so forth.

What if the child tax credit exceeds your tax liability?

Your total child tax credits reduce your tax liability. For example, if you qualify for a $6,000 credit and owe $10,000 in income taxes, the credit will reduce your tax liability to 4,000.  If your child tax credits exceed your tax liability, the excess is not paid to you by the IRS. In tax-speak, the credit is "nonrefundable" But you may be able to get a refund for the balance by claiming the "additional child tax credit."

The additional child tax credit

The additional child tax credit is partially refundable. This means the IRS pays it to you even if it exceeds your tax liability. The refundable amount is equal to 15% of your taxable earned income. But the maximum refundable amount is $1,400 per qualifying child.  Example: A couple owes $6,000 in income tax. They have four qualifying children and get a $8,000 child tax credit. Their child tax credit reduces their tax liability to zero. They have $2,000 in unused credits which they claim as an additional child tax credit. They qualify for a refundable additional child tax credit of $1,400. This means the IRS sends them a check for $1,400.  To determine if you are eligible for the additional child tax credit, complete the Child Tax Credit Worksheet¬†in the Form 1040 instructions. The worksheet will determine if you should complete Schedule 8812 to see if you are eligible for the refundable portion of the credit.

How to calculate your child tax credit

The IRS has created a worksheet you can use to calculate the credit. But tax preparation software can do it for you as well.

How do you claim the child tax credit?

You claim the basic child tax credit on IRS Form 1040, line 12a, and check the appropriate box in column (4) of the Dependents section. You must provide a social security number for each qualifying child.  File Schedule 8812 with your income tax return to claim the child tax credit.

How did tax reform change the child tax credit?

The Tax Cuts and Jobs Act (TCJA), the massive tax reform law that took effect in 2018, made the child tax credit much better for all taxpayers. The TCJA doubled the maximum amount of the credit from $1,000 to $2,000.  The tax reform law also vastly increased the level of income taxpayers can earn and still obtain the credit. Under the old law, the credit phased out for marrieds filing jointly who earned $110,000 and for singles who earned $55,000. These thresholds are now $400,000 for marrieds and $200,000 for singles. It is expected to affect few taxpayers.  The TCJA also made up to $1,400 of the credit refundable. Under prior law, no part was refundable  For more information on the child tax credit, see IRS Publication 972, Child Tax Credit.

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