CARL WATTS & ASSOCIATES

August 06, 2018

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The Child Tax Credit
With most of taxpayers, discerning between credits and deductions has always been a challenge. What you need to remember to help you with this dilemma is the following:

Deductions reduce taxable income and their value thus depends on the taxpayer’s marginal tax rate, which rises with income.


Credits reduce taxes directly and do not depend on tax rates. However, the value of credits may depend on the taxpayer’s basic tax liability. Nonrefundable credits can reduce tax to zero but any credit beyond that is lost.

With the Tax Cuts and Jibs Act (TCJA) in place, many of you enjoying a numerous family, may have wondered what changes are there to the child tax credits you were maybe accustomed to.

The Child Tax Credit (CTC) has been available to taxpayers since 1998 and was created to help offset the cost of raising children. Originally, taxpayers could take a $400 credit for each qualifying child under the age of 17. The credit changed over time, however. By 2017, the credit was worth $1,000 per qualifying child and was gradually phased out for single tax filers with an adjusted gross income (AGI) above $75,000 ($110,000 for joint filers).

The TCJA has brought great changes to the Child Tax Credit, which affect most parents and guardians of children under 17 in the United States.

Credit Amount

The 2018 Child Tax Credit is now $2,000 per qualifying child. The child must be under 17 at the end of the tax year (12/31/18) to claim it. The credit applies if the taxpayer claims the child as a dependent and houses the child for at least half the year.

Credit Refunds

If a taxpayer is owed a refund, the refundable portion of the credit increased to $1,400 in 2018 (previously the credit was nonrefundable). That means if you don’t owe any tax before claiming the credit, you will receive up to $1,400 as part of your refund. The refundable amount will be adjusted upward for inflation.


Earned Income Threshold

The income threshold to claim the credit lowered to $2,500 per family, which means that a family must only earn $2,500 or more to claim the credit.

Phaseout
The CTC has a phaseout component in 2018, but the AGI amounts are much higher:

Tax Filing Status
Maximum AGI for Full Credit
AGI Where Credit Disappears

Single
$200,000
Over $240,000

Married filing jointly
$400,000
Over $440,000

Head of household & married filing separately
$200,000
Over $240,000

A qualifying child for this credit is a child who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.

Age test:

  • the child must be under age 17 at the end of the year (that is, the child is 16 years old or younger);
  • the child is younger than the taxpayer.

Relationship test:

  • the child is related to the taxpayer as a son, daughter, stepchild, foster child, adopted child, brother or sister; or a descendant of any of these relations such as a grandchild, nephew, or niece.
Support test:

  • the child did not provide more than half of his or her own financial support.

Dependent test:

  • the child meets the criteria to be claimed as a dependent of the taxpayer;
  • the child is claimed by his or her parents; if claimed by someone else, that person must have an adjusted gross income higher than the adjusted gross income of either parent.

Joint return test:

  • the child does not file a joint tax return with his or her spouse (although some exceptions may apply).

Citizenship test:

  • the child is a citizen or resident alien of the United States.

Residence test:

  • the child lived with the taxpayer for more than half the year.

An eligible taxpayer for the CTC must, of course, have qualifying children and a certain income level, or, to be more exact, a certain modified adjusted gross income.

Credit for Other Dependents

A new credit of up to $500 is available for each of your dependents who does not qualify for the child tax credit. There is no age limit for the $500 credit.

The potential dependent must still meet tax tests for dependency, however. This credit may apply to taxpayers who support a dependent who is a full-time student or disabled. In addition, the maximum income threshold at which the credit begins to phase out is increased to $200,000 ($400,000 if married filing jointly).

It is important to remember that your child must have an SSN issued before the due date of your 2018 return (including extensions) to be claimed as a qualifying child for the child tax credit or additional child tax credit.

If your dependent child has an ITIN, but not an SSN, issued before the due date of your 2018 return (including extensions), you may be able to claim the new credit for other dependents for that child.

If you have qualifying children, in addition to filling out the appropriate lines in your 1040 form, you will also want to submit IRS Schedule 8812.

Use Part I of Schedule 8812 to document that any child for whom you entered an ITIN and for whom you also checked the "if qualifying child for child tax credit" box, is a resident of the United States because the child meets the substantial presence test and is not otherwise treated as a nonresident alien.

Use Parts II–IV of Schedule 8812 to figure the additional child tax credit. Once again, the additional child tax credit may give you a refund even if you do not owe any tax.

The IRS also offers a tool on their website to determine if your child qualifies for the child tax credit.


It is also important to realize that, while the Child Tax Credit has indeed gone up, taxpayers are losing the personal exemption which until now has been available for every taxpayer and each of their dependents.

All changes to the new Child Tax Credit expire after December 31, 2025.

If in any doubt, or even better, in any case and in all your dealings with the IRS, professional help in planning ahead and calculating which credit serves you better is certainly recommendable.
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