Tax Cuts and Job Act Improvements to the Child Tax Credit

The Tax Cuts and Jobs Act (the “Act”) made improvements to the Child Tax Credit, the credit available to taxpayers with children under the age of 17 (“qualifying children”), and enacted a new credit for other dependents.

Under pre-Act law, the Child Tax Credit was $1,000 per qualifying child, but it was reduced for married couples filing jointly by $50 for every $1,000 (or part of a $1,000) by which their adjusted gross income (AGI) exceeded $110,000. (The threshold was $55,000 for married couples filing separately, and $75,000 for unmarried taxpayers.) To the extent the $1,000-per-child credit exceeded a taxpayer’s tax liability, it resulted in a refund up to 15% of earned income (such as wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of their Social Security taxes for the year over their Earned Income Credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.

Starting in 2018, the Act doubles the Child Tax Credit to $2,000 per qualifying child under 17. It also allows a new $500 credit (per dependent) for any dependents who are not qualifying children under 17. There is no age limit for the $500 credit, but dependents must meet tax tests. Under the Act, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned threshold is decreased to $2,500 (from $3,000 under pre-Act law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

The Act also substantially increases the phase-out thresholds for the credit. Starting in 2018, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the pre-Act threshold of $110,000). The threshold is $200,000 for all other taxpayers. If taxpayers were previously prohibited from taking the credit because their AGI was too high, they may now be eligible to claim the credit.

To claim the credit for a qualifying child, you must include that child’s Social Security number (SSN) on your tax return. Under pre-Act law you could also use an Individual Taxpayer Identification Number (ITIN) or Adoption Taxpayer Identification Number (ATIN). If a qualifying child does not have an SSN, you may not claim the $1,400 credit, but you may claim the $500 credit for that child using an ITIN or an ATIN. The SSN requirement does not apply for nonqualifying child dependents, but you must provide an ITIN or ATIN for each dependent for whom you are claiming a $500 credit.

The changes made by the Act should make these credits more valuable and more widely available to many taxpayers.

If you have children under 17 or other dependents and want to determine if these changes can benefit you, please give us a call.