The Child Tax Credit was designed to help working families by offsetting some of the expenses that come with raising children. A staple of federal tax regulations since 1998, the credit has changed more than once over the past 20 years. The Tax Cuts and Jobs Act (TCJA), signed into law in December, made further changes to this credit, making it available to more parents.
Previous Tax Rules for the Child Tax Credit
In the first year it was available, the Child Tax Credit offered a $400 nonrefundable credit parents could claim on their tax returns for each dependent child under the age of 17 (16 or younger on December 31).
By 2017, the credit amount had risen to up to $1,000 per qualifying child, and was refundable for taxpayers whose earned income was at least $3,000. This means that, even if the credit resulted in the family’s income being below zero, they could still get a tax refund.
The amount of the credit rose as taxpayers’ income rose, although if taxable income was too high, the credit disappeared. Single taxpayers with adjusted gross income (AGI) of $75,000 or more, and married couples filing joint tax returns with AGI of $110,000, were affected by income phaseouts.
Only the taxpayer eligible to claim the child as a dependent was eligible to claim the Child Tax Credit for 2017. If you have not yet filed your 2017 taxes, these 2017 rules will apply.
Changes Under the Tax Cuts and Jobs Act
Tax reform enacted in the TCJA made several changes to the Child Tax Credit, beginning with tax year 2018.
First, the credit amount is now worth up to $2,000 per child – double the amount available in 2017. However, in order to qualify, children must still be under age 17 at the end of the year. Also new for 2018, each child must have a valid social security number in order to claim the credit.
The credit is partially refundable, up to $1,400, adjusted for inflation in future years. The earned income threshold has been lowered to $2,500 from $3,000.
Phaseout amounts have also been raised substantially under the new tax law. For 2018, individual taxpayers can make up to $200,000 before being affected by the phaseouts, and married couples filing joint returns can make up to $400,000 before phaseouts begin. There is no separate phaseout amount for taxpayers filing as head of household.
While the Tax Cuts and Jobs Act has removed the dependent exemption, a child must still meet the definition of a dependent in order for a taxpayer to claim the Child Tax Credit. Generally, this means that the taxpayer must be related to the child somehow, the child cannot provide more than one-half of his or her own support, and he or she must live with the taxpayer for more than half the year.
One important point to note is that these changes to the Child Tax Credit are scheduled to expire in 2025.
The New Family Credit
Under the new tax law, some taxpayers will also be able to take advantage of a new $500 non-refundable family credit. This is intended to help offset the cost of raising dependents in your household even if they don’t meet the definition of a dependent for the Child Tax Credit.
Your Tax Professional Can Help You Make Sense of The New Rules
While much of the TCJA helped simplify tax rules, there is still some complexity around the Child Tax Credit. To learn more or to explore your eligibility for the credit, contact us or download your guide to tax reform.