Changes to the Child Tax Credit

TThe Tax Cuts and Jobs Act passed in late 2017 brought a few changes to the Child Tax Credit. The Child Tax Credit has been around for many years. First available in 1998, the motivation was to create a credit to, in some small way, help offset the cost of raising children. Before the Tax Cuts and Jobs Act, the credit was worth up to $1,000 per qualifying child. The credit was refundable and began to phase out for taxpayers with adjusted gross income above $75,000 ($110,000 for those married filing jointly).

Congress attempted to alleviate the loss of exemptions on the tax return by increasing the benefits of the Child Tax Credit for years 2018 to 2025. Additionally, by increasing the thresholds for eligibility, more middle and high-income taxpayers may now be eligible for the credit.

The new law increased the Child Tax Credit amount to $2,000 per qualifying child. The credit is not adjusted for inflation each year. However, eligibility for the credit has not changed. The definition of dependents that was used to determine exemptions still determines eligibility for this credit. The credit generally applies if all the following are true:

  • the child is younger than 17 at the end of the tax year
  • the child is related to the taxpayer
  • the child lived in the home more than half the year
  • the child did not provide more than half of their own support

The credit remains refundable, but now up to $1,400. This means that if a taxpayer doesn’t owe any tax before claiming the credit, they will receive up to $1,400 as part of their refund. Unlike the credit amount, the refundable portion is adjusted for inflation. Assuming inflation continues, the refundable portion will get closer to the full $2,000 credit amount. The refundable portion of the credit only applies if the taxpayer cannot fully use the $2,000 credit to offset their tax liability. The earned income threshold has also been lowered to $2,500 per family. This means a family must earn a minimum of $2,500 to claim the credit.

The Tax Cuts and Jobs Act also added a new credit for dependents who can’t be claimed under the Child Tax Credit. This credit is called the Credit for Other Dependents, a non-refundable credit of up to $500 per qualifying person. A qualifying person can include dependent children who are over age 17 or full-time college students as well as parents or other relatives supported by the taxpayer under the old qualifying dependent relative exemption rules. For the dependent to qualify, they must meet certain relationship, gross income, and support tests. The phaseout limitations also apply to this credit.

If you have any questions or concerns regarding the changes to the Child Tax Credit, please contact a member of our tax department and we will be happy to provide further clarification, 517.323.7500.

About the Author: Samantha Schrauben, CPA is an associate in Maner Costerisan’s tax department. She has a Bachelor’s and Master’s Degree in Accounting from Michigan State University.

Sources: https://www.journalofaccountancy.com/issues/2018/jun/child-tax-credit.html and https://www.irs.gov/newsroom/whats-new-with-the-child-tax-credit-after-tax-reform