The 2018 tax filing season marked the first time taxpayers could leverage the new and improved Child Tax Credit. While the credit has been around for nearly 20 years, the Tax Cuts and Jobs Act expanded the credit, making it available to more taxpayers and increasing the size of the credit. For those taxpayers who have filed an extension or may not have leveraged the full benefits of the credit this filing season, here is what you need to know about future Child Tax Credit deductions.
It is more available. Prior to 2018, the income limitations on households allowed to claim the credit were much lower. The Child Tax Credit was only available for individuals earning less than $75,000/year ($110,000 married, filing jointly). With the new law, the income limitation increased significantly, and eligibility doesn’t phase out until income is greater than $200,000 ($400,000 married, filing jointly). Click here if you are married filing separately and need more information.
It is larger. The new credit is now twice as large as the previous credit of $1,000 per qualifying child. Tax filers can now receive a $2,000 credit per qualifying child. Similar to years past, there are special restrictions when claiming a child on your taxes, such as age, relationship, whether or not they are a dependent or whether or not the child is a U.S. citizen, among others.
It is partially refundable. Credits are often better than deductions because they decrease your tax liability dollar-for-dollar, but a refundable credit is even better. In fact, up to $1,400 of the credit is refundable to the taxpayer, meaning that if the credit is greater than your tax liability, it is refundable to you.
It is temporary. Like many other provisions in Tax Cuts and Jobs Act, the 2018 Child Tax Credit is subject to sunset in 2025, unless legislative action is taken prior to then.
It is limiting. To be eligible for the credit of a “qualifying” child, you must pass these four tests:
- Age – The child must be younger than 17 years old by the end of 2018.
- Relationship – The child must be a direct descendent, foster child, stepchild, sibling or a direct descendent of a sibling.
- Home – The child must have lived with you for more than half the year.
- Dependence – You must have provided at least half of the child’s support throughout the year.
It is finite. As with past Child Tax Credits, only one parent can claim it. Thus, in instances of separation or divorce, only one parent will receive the credit.
It is one of two child tax credits. The credit referenced in this blog does not replace the Child/Dependent Care Expense Credit that tax filers can claim to offset childcare expenses. There is more information on this credit and other ways to cut childcare costs here.
The Tax Cuts and Jobs Act made some significant changes to the tax law, and the expansion of the Child Tax Care Credit is one taxpayers with dependents will appreciate.
For more information and assistance on leveraging the new Child Tax Credit, find a CFP® professional near you here.