Understanding the Child Tax Credit

The Child Tax Credit Under the Tax Cuts & Jobs Act (TCJA) has changed dramatically. However, since we’re dealing with the IRS here, the details of this credit can be a little difficult to figure out. Here is what you need to know about both the child tax credit and the additional child tax credit so that you can maximize your allowable tax credit.

Basic Requirements

The requirements of the child tax credit remain similar to 2017 requirements:

  • You must have at least one dependent child who is under the age of 17 at the end of the tax year.

  • That child must not have provided more than half of his or her own financial support.

  • The child must live with the taxpayer for more than half the tax year.

  • The child must also be a U.S citizen, a US national or a US resident Alien. Additionally, the child must have a social security number and it must be provided to the IRS upon filing your tax return.

Understanding the Child Tax Credit

The taxpayer will receive a $2,000 credit which will reduce tax liability dollar for dollar. Each qualifying child receives the $2,000 child tax credit. This means that if the taxpayer owes any money, that $2,000 per child will go toward wiping out their tax liability.

However, it’s important to note that the credit begins phasing out for taxpayers earning above a particular threshold:

• Married filing jointly - $400,000 or more • Head of Household or single filers - $200,000 or more

Those taxpayers earning more than the threshold are eligible for a reduced credit. However, the Credit for High-income earners is reduced by $50 for every $1,000 over the threshold until the credit is completely phased out.

A Credit for Qualifying Dependents other than Children

Starting in 2018, TCJA has eliminated the exemption for all tax payers and their dependents. However, TCJA includes a provision allowing a credit of $500 for all non-child dependents. To qualify for the family tax credit the dependent(s) must meet all dependency requirements.

  • The dependent must be related to you or any other person who lived with your all year as a member of your household.

  • The dependent cannot be claimed by another different taxpayer.

  • The dependent can’t have earned more than $4,050 for the year.

  • The dependent was supported by the taxpayer financially at least 50% or more during the year.

How the Child tax credit works

Beginning in 2018 TCJA has tried to simplify this tax credit by coupling the child tax credit with its refundable partner the additional child tax credit. In 2018, the child tax credit allows up to $1,400 of the $2,000 to be refundable. Meaning that the credit is first used to decrease any tax liability due to the IRS and then any amount that may be left over is refundable to you. The refundable amount is limited to $1,400, so even if you have no tax liability you wouldn’t receive the full $2,000 as a refund, but instead you would receive $1,400.

The Additional Child Tax Credit

Starting in 2018, the additional child tax credit has been eliminated and is no longer available to taxpayers.

The Bottom Line

Although the details of this tax credit can feel a little convoluted, taking the time to get your child tax credit will certainly be worth it. You might even feel like taking the kids out for an ice cream on Tax Day to thank them.

If you need some assistance and would like us to prepare your taxes, give us a call at 866-920-2827 to learn more about our services.

Image source - https://www.flickr.com/photos/thetalesend/

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