February 6, 2018 8:55 pm

How the New Child Tax Credit Works

The child tax credit first appeared on tax returns for 1998 as a $400 nonrefundable credit. Over the years, the credit amount has increased and part of it has become refundable (i.e., payable even if it’s more than an individual’s tax bill). The Tax Cuts and Jobs Act of 2017 dramatically enhances the credit starting in 2018. These changes run only through 2025 unless Congress extends them. Some rules, however, have not been changed. Here’s a rundown of what’s new and what’s unchanged:

1.     Qualifying child

The credit applies for a qualifying child, who is someone under age 17 at the end of the year (unchanged from prior law). This age limit is fixed and does not change even if the child is disabled.

The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them (for example, your grandchild, niece, or nephew) and does not provide more than half of his or her own support. Other conditions:

  • Living with you for more than half the year.
  • Being a U.S. citizen, U.S. national, or U.S. resident alien.
  • If married, the child does not file a joint return (other than to claim a refund of withheld income taxes or estimated taxes paid).
  • The child has a Social Security number (starting in 2018 this must be issued for a qualifying child before the return is filed).
  • The child meets the definition for being your dependent (even though the dependency exemption does not apply starting in 2018). Special rules apply to parents who are divorced, legally separated, or not married.

2.      Amount of the credit

The new credit is up to $2,000 per qualifying child. Before 2018 (e.g., on 2017 returns), the maximum credit was $1,000 per child. However, the credit is subject to income limits (see #4 below).

There is no cap on the number of qualifying children for whom the credit can be claimed. Thus, a family with four qualifying children is eligible for a credit of up to $8,000 (subject to the income limits).

And starting in 2018 there’s a nonrefundable credit of up to $500 for a qualifying dependent (under the former rules for a dependency exemption) who is not a qualifying child (e.g., a child who’s 19 years old and a full-time student). This credit is subject to the same income limits (see #4 below) as the credit for qualifying children.

3.      Refundable portion

The refundable portion of the credit is referred to as an additional child tax credit, but it is merely a portion of the overall credit that can be paid to a taxpayer even if it exceeds the tax liability for the year.

For 2017 returns, the additional child tax credit is 15% of earned income over $3,000, with a maximum refundable credit of $1,000 per child. For families with three or more qualifying children, there’s an alternative formula for figuring the refundable portion of the credit.

Starting in 2018, the refundable portion of the credit is up to $1,400 per qualifying child. For years after 2018, this dollar limit will be adjusted for inflation. The earned income threshold is lowered to $2,500.

4.      Income limits

On 2017 returns, the credit phases out once your modified adjusted gross income (MAGI) exceeds:

  • $110,000 if married filing jointly
  • $75,000 if single, head of household, or a qualifying widow(er)
  • $55,000 if married filing separately

The credit is reduced by $50 for each $1,000 of MAGI over the applicable threshold.

Starting in 2018, the phase-out starts at $400,000 for joint filers and $200,000 for other taxpayers. The phase-out thresholds are not indexed for inflation.

5.      Other rules

A taxpayer who claims the foreign earned income exclusion cannot claim the additional child tax credit (refundable portion). This exclusion can be waived in order to take this tax credit.

The refundable credit cannot be paid to a taxpayer before February 15th. This means a refund for a credit claimed on a 2017 return likely won’t be received until late in February 2018, no matter how early the return is filed.

Conclusion

The new law enhances the child tax credit and introduces a new credit for dependents other than qualifying children. Talk with your CPA or other tax adviser about taking advantage of the new rules.