As 2019 approaches, today is a good time to discuss revisions to the Child Tax Credit, to take the proper steps to capture all that is available.
Under the 2017 Tax Cuts and Jobs Act, family personal exemption amounts were eliminated. To compensate families with children the child tax credits were expanded for 2018 forward.
Accordingly, the maximum Child Tax Credit has doubled, with a substantial increased to income levels allowing a far greater number of high-income households qualifying for the credit.
For families that do not meet the requirements to qualify for the Child Tax Credit, the newly established Credit for Other Dependents credit is available for households that support older children and other dependent relatives.
The following is a summary of both credits.
Child Tax Credit
Income limits with higher thresholds now allow a greater amount of high earning households to capture the Child Tax Credit. The income limits to capture one-hundred percent of the credit now stand at $200,000 for single filers, and $400,000 for joint filers. This is up from $75,000 for single filers, and $110,000 for joint filers last year. The credit begins to slowly reduce at these prescribed income limits.
These income levels are based on modified adjusted gross income. MAGI can be calculated after finalizing adjusted gross income by adding back certain deductions, many of which are rare and not realized by individuals. Often it is best to let the CPA tax preparer, or professional tax software, calculate the amount.
The credit itself has increased from $1,000 to $2,000 per qualifying child providing the child has not turned 17 years old at the end of the tax year. Additionally, the must be the dependent of the taxpayer, as well as, have lived with the taxpayer more than six months of the year. The qualifying child must have a valid Social Security number, as well.
It’s also a partially refundable
Up to $1,400 of the Child Tax Credit can be refundable for each qualifying child. Thus, a refund can be created even if the taxpayer does not owe tax. The refundable portion of the child tax credit is limited to 15% of portion of earned income that exceeds $4,500.
A child tax credit is a reduction of tax i.e more than a mere tax deduction. Because it’s a tax credit, it directly reduces the amount you owe the IRS. So, for example, if your tax liability is $6,000, and you qualify for a child tax credit for $1,200, you will owe $4,800. A deduction of $1,200 would merely deduct your total income by that amount with a tax savings substantially less than a $1,200 credit.
You should also understand the difference between refundable and non-refundable tax credits. A nonrefundable credit can cut your bill down to zero. But if the actual math ends up edging into the negative, you won’t get the difference back.
Thus, for example, if in addition to the tax owed of $6,000 above you also qualified for $6,600 in non-refundable tax credits, your tax will would be reduced to $0 owed. The remaining $600 would not be refunded (nor carried-forward). If these were refundable tax credits, the remaining $600 would be refunded.
Credit for Other Dependents
The Credit for Other Dependents is newly available for households that cannot claim the Child Tax Credit. The new credit applies to dependent children age 17 or older at the end of 2018 or parents or other qualifying relatives supported by the dependent.
Please note that the credits cannot be carried forward to future years. Accordingly, the credits should be claimed in a certain order to get the most benefit. You might need to calculate other credits first to properly apply the child tax credit. Please contact me for further advise.