The recently passed GOP tax reform bill makes several major changes to individual tax laws in the United States. Some of the biggest changes were made to the Child Tax Credit, which affects most parents and guardians of children under 17 in the United States.
If you have children, here’s what you need to know about the changes made to the Child Tax Credit for the 2018 tax year and how they could affect you.
The Child Tax Credit is being doubled for 2018
The Child Tax Credit is available to be claimed for qualified children under age 17. And you can claim it for all of your qualifying children in a given tax year. To be clear, the child must be under 17 at the end of the year to claim the credit.
For 2018, the recently passed GOP tax reform bill doubles the amount of the Child Tax Credit from $1,000 to $2,000 per qualifying child. In other words, if you have one child, you’ll be able to claim a $2,000 credit. For two children, your credit is $4,000. Three children… well, you get the idea.
It’s also important to emphasize that this is a credit, not a tax deduction. While a deduction reduces the amount of your income that is subject to tax, a credit reduces your tax bill dollar-for-dollar. If you owe the IRS $5,000 for the year, and have a $2,000 tax credit, your tax bill drops to $3,000.
More of the credit is refundable
Another important distinction when it comes to tax credits is refundable versus nonrefundable credits. A nonrefundable credit can be used to reduce a taxpayer’s bill all the way down to zero. On the other hand, a refundable tax credit can be given even if a taxpayer ends up with no tax liability at all. If your calculated tax for the year is $1,000, and you have $1,500 in refundable tax credits to claim, you can reduce your tax bill to zero and get back that extra $500.
In a nutshell, refundable tax credits are better, especially for lower-income Americans.
So, in addition to the doubling of the Child Tax Credit amount, the tax reform bill also makes up to $1,400 of the credit amount refundable, while in previous years the Child Tax Credit was a nonrefundable credit (however, there was formerly an Additional Child Tax credit that effectively made the old Child Tax Credit refundable). In other words, even if a taxpayer has no tax liability whatsoever, he or she can get back $1,400 for each qualifying child starting with the 2018 tax year — and this amount will be indexed for inflation in future years.
However, the refundable portion of the credit is capped at 15% of your earned income in excess of $4,500. This effectively means that if your earned income is greater than $13,833, your refundable credit amount is only capped by the $1,400 limit, and if it is less, the refundable portion of the credit can be reduced.
Income thresholds are rising dramatically
The third big change to the Child Tax Credit for 2018 involves the income qualifications. In previous tax years, the credit has only been available for low- to middle-income households. For instance, the credit began to disappear in 2017 for married couples who earned more than $110,000 and for single filers with AGI above $75,000.
In 2018, the credit will be available to far more households, thanks to a massive raise in the phaseout thresholds. Here’s a quick guide to the Child Tax Credit phaseout thresholds for 2018.
|Tax Filing Status||Maximum AGI for Full Credit||AGI Where Credit Disappears|
|Married filing jointly||$400,000||Over $440,000|
|Head of household||$200,000||Over $240,000|
|Married filing separately||$200,000||Over $240,000|
DATA SOURCE: GOP TAX REFORM BILL.