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Beginning in the 2018 tax year, under the Tax Cuts and Jobs Act, the tax credit available per qualifying child for taxpayers with children under age 17 will double.
Previously (including for 2017 tax returns), the child tax credit was $1,000 per qualifying child, but was subject to rules that made it complicated to figure. For example, for married couples filing jointly the credit was reduced by $50 for every $1,000 by which their adjusted gross income (AGI) exceeded $110,000. The threshold was $55,000 for married couples filing separately, and $75,000 for unmarried taxpayers. To the extent the $1,000-per-child credit exceeded their tax liability, taxpayers received a refund of up to 15% of earned their income above $3,000. An additional complication; for taxpayers with three or more qualifying children, the excess of the taxpayer’s yearly social security taxes over the taxpayer’s yearly earned income credit was refundable. In all cases the refund was limited to $1,000 per qualifying child.
Starting in 2018, the child tax credit increases to $2,000 per qualifying child under 17.
There are six IRS tests that must be met to qualify for the child tax credit:
- Age Test: The child claimed as your dependent must be under age 17 at the end of the tax year.
- Relationship Test: The child must be your daughter, son, foster child or adopted child. The child may also be a grandchild or a descendant of one of your siblings and must meet the 5 other criteria to qualify.
- Support Test: The child must not have provided more than half of their own “support,” meaning the money they use for living expenses.
- Dependent Test: You must claim the child as your dependent on your federal income tax return.
- Citizenship Test: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
- Resident Test: The child must have lived with you for more than half of the tax year.
Under the Tax Cuts and Jobs Act, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned income threshold is decreased to $2,500 (from $3,000 under pre-Act law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.
The Act also substantially increases the credit’s “phase-out” thresholds. Starting in 2018, the total credit amount allowed for a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000. The threshold is $200,000 for all other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.
In order to claim the credit for a qualifying child, you must include that child’s Social Security number (SSN) on your tax return. Under pre-Act law you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). If a qualifying child does not have an SSN, you will not be able to claim the $2,000 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN. The SSN requirement does not apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you are claiming a $500 credit.
Tax reform also allows a new $500 credit (per dependent) for any dependents who are not qualifying children under 17 beginning this year (2018). There is no age limit for the $500 credit, but the tax tests for dependency must be met.
The changes made by the Act should make these credits more valuable and more widely available to many taxpayers. If you have children or other qualifying dependents under age 17, and would like to learn if these changes can benefit you, please contact one of our tax preparation experts at McRuer CPAs online or call 816.741.7882.
