Tax Reform’s Changes to the Child Tax Credit | Spire Group, PC
The Tax Cuts and Jobs Act is being touted as pro-taxpayer legislation, and it’s easy to see why – the tax rates have been lowered, the AMT exemption has grown, and the standard deduction has almost doubled. However, the recent tax reform also eliminated quite a few taxpayer perks. The state and local tax deduction is now limited to $10,000; the home mortgage interest deduction is limited to interest on home purchases of $750,000 (down from $1 million); and the 2% miscellaneous deductions, like unreimbursed employee expenses, have been eliminated. One of the biggest losses to many taxpayers, however, will be the loss of the dependency exemption. Taxpayers with more than just one or two children may end up with the short end of the stick now that the exemption lifeline has been pulled away. In an effort to combat this concern, Congress chose to expand the Child Tax Credit.
Tax Law Changes
The Child Tax Credit (CTC) was first introduced in 1998, and it started out as a nonrefundable credit of $400 per qualifying child. By 2017, the CTC had been expanded to provide a refundable credit of up to $1,000 per child. The recently-passed Tax Cuts and Jobs Act expanded the credit even further. Going forward, taxpayers can take $2,000 per child, the refundable portion of which is up to $1,400. Unfortunately, like many of the provisions introduced in the Tax Cuts and Jobs Act, the expanded CTC is only available through the year 2025, after which it reverts back to 2017 amounts.
Requirements to Claim the Credit
Many of the requirements to claim the CTC remain the same as they were last year. The most important test is the qualifying child test. To take the credit for one of your children, you must be able to prove they are a “qualifying child.” To do this, the child must pass each of the following five tests:
- Age test. At the end of the tax year for which the credit is claimed, the child must have been under the age of 17.
- Relationship test. The child must be one of the following:
- biologically yours
- adopted (or in the process of being adopted)
- a stepchild
- a foster child
- your sibling or stepsibling
- the descendent of any of the above people (i.e. your nieces, nephews, or grandchildren)
- Support test. The child cannot have paid for more than half of his or her own financial support during the qualifying tax year.
- Citizenship test. The child must be a US citizen, national, or resident alien.
- Residence test. The child must have lived with you for at least half of the year, except in the following scenarios:
- The child was born or died during the tax year
- The child was away for special circumstances such as school, military service, medical treatment, or detention in a juvenile facility
There are a few additional requirements to claim the credit that are new this year. They are:
- To qualify, the child must have a valid social security number. It is estimated that 1 million undocumented children will be unable to qualify for the credit as they have in years past because of this new rule.
- The full credit is only available to taxpayers whose adjusted gross income is below a certain amount – $200,000 for single filers, and $400,000 for joint filers. This is a huge increase from the thresholds of 2017, which were $75,000 and $110,000 respectively. This will make the CTC available to high earners.
- For any portion of the credit to be refundable, the taxpayer must have earned income of at least $2,500. This refundable portion will be limited to 15% of earned income that exceeds that threshold. In other words, your earned income must be at least $13,834 to receive the full $1,400 refundable credit.
The Child Tax Credit is just one of the many changes in the Tax Cuts and Jobs Act that will impact your tax planning strategies for the next few years. Contact our Spire Group professionals if you’d like to discuss this credit or any other tax law change that has been worrying you. We are here to help.