Understanding the New Child Tax Credit

By Greer Gibson Bacon, CFP®

The Tax Cuts and Jobs Act (TCJA) greatly expands the Child Tax Credit, as illustrated below. It becomes available to more middle and upper-middle class families. And importantly, it boosts the amount refundable to low income families.

 

The “Old” Law

The “New” Law

Credit Amount

$1,000/child

$2,000/child, $500/other dependent

Married Taxpayers:

 

 

           Full Credit

AGI of $110,000 or less

AGI of $400,000 or less

           Partial Credit

AGI of $110,001 to $130,000

AGI of $400,001 to $440,000

           No Credit

AGI > $130,001

AGI > $440,001

Single Taxpayers:

 

 

  Full Credit

AGI of $75,000 or less

AGI of $200,000 or less

  Partial Credit

AGI of $75,001 to $95,000

AGI of $200,001 to $240,000

No Credit

AGI of $95,001 or more AGI of $240,001 or more

Refundable Amount

$1,000/child $1,400/child

Here’s what you need to know to maximize your family’s Child Tax Credit:

  • Your qualifying child is your dependent child who is age 16 or younger on the last day of the year.  Other qualifying dependents may be your aging parent or child age 17 or older for whom you provide support and claim as a dependent. 
  • Tax deductions and tax credits are not alike.  Tax deductions reduce the amount of your taxable income.  For example, if you’re married with two children, your 2018 personal exemptions would have been $16,600 ($4,150 x 4) and you would have deducted this amount from your total income.  By contrast, tax credits reduce your income tax payable dollar-for-dollar.  For example, if you owe $25,000 in income taxes and apply $4,000 in tax credits, your tax payable is reduced to $21,000.

Although the JCTA eliminates personal exemptions, this may have little or no impact on families.  For example, a married couple with two children loses $16,600 in personal exemptions but gains $4,000 in tax credits.  And assuming a 24% tax bracket[1], their tax credits produce the same $4,000 in tax savings that $16,600 in personal exemptions would have produced.    

  • Tax credits may be refundable or non-refundable.  Here’s how this works.  Let’s say your 2018 taxes payable are $3,000 and you have $4,000 in tax credits.  If your tax credits are refundable, your taxes will be reduced to “zero” and you’ll receive a $1,000 check.  By contrast, if they’re non-refundable, your taxes will be reduced to “zero” and the $1,000 will be lost.  Clearly, refundable tax credits are better especially for low income families.   
  • The refundable part of the new Child Tax Credit is calculated as 15% of earned income exceeding $2,500 subject to a cap of $1,400 per qualifying child.  No part of the $500 per other dependent tax credit is refundable. 

These enhanced benefits sunset at the end of 2025 unless extended or made permanent by Congress.  So, stay tuned. 

 

 

 

 

 


[1] In 2018, the 24% tax bracket applies to married couples with taxable income of $165,001 to $315,000.

 

 

This article first appeared in the June/July 2018 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.

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