For years now we have had the Child Tax Credit (CTC) a $1,000 refundable credit for those dependents that we claim that are qualifying children. Now there is another credit that takes some of the disadvantages of the CTC and addresses them in the form of an additional credit to reduce your tax bill.
The new Family Tax Credit for “other dependents” could result in a decrease of your tax bill, even for those who have phased out the CTC because their children are age 17 or older. The credit is also helpful for those that are a part of the sandwich generation and are supporting aging parents who qualify as dependents.
Basics of the Child Tax Credit
The biggest benefit of any credit is that it is a credit. A credit is a dollar for dollar reduction in your tax bill. By contrast, a deduction only reduces your taxable income. A good illustration is for someone in the 25% tax bracket, a $1,000 deduction only results in a $250 reduction to the tax bill. This credit, on the other hand, reduces the tax bill by $1,000. A deduction for individuals in the 25% tax bracket would need to be $4,000 to have the equivalent effect. I know, for at least now through 2025 we don’t have the 25% bracket anymore, but the math works out well for illustration purposes. In 2018, the Child Tax Credit increases to $2,000 per qualifying child.
To be eligible for the CTC, taxpayers must have qualifying children to claim as dependents (special rules apply to parents of children who are divorced) on their tax returns. To be qualifying, the children must live with the taxpayer more than half the year, the taxpayer must provide more than 50% of the child’s support and the child cannot be older than 16 years of age. The credit also phases out in increments as income increases.
In addition, the Child Tax Credit is refundable, meaning even if there is no tax due on a tax return, the taxpayers could receive a check from the government for the amount of their tax credit. In 2018, the refundable portion is limited to $1,400.
The New “Family Tax Credit” for Other Dependents
Taxpayers have long been able to claim those they have supported throughout the year and who have met certain criteria, but while we have been able to continue to claim our children after they have reached the age of 17, the credit has not been available. If you go through as much milk in a week as we do in our household, you would be happy to take any credit you can get!
The new “Family Credit” is $500 and is nonrefundable. The same thresholds required to claim someone as a dependent apply to those who may qualify for this credit.
New Phaseout Thresholds
Income thresholds have often left two-income families that live in high locality rate locations at a disadvantage when it comes to qualifying for credits. Think places like DC Metro Area, urban California, New York, etc. These locations often have high salaries, but the cost of living, local taxes, and expenses are also high. The new tax law increases thresholds and limitations for qualifying for the increased child tax credit.
Tax Filing Status Max AGI for Full Credit AGI for Full Phase Out
Single $200,000 Over $240,000
Married filing jointly $400,000 Over $440,000
Head of household $200,000 Over $240,000
Married filing separately $200,000 Over $240,000
Elimination of Dependency Exemptions
While the new CTC, Family Tax Credit, and increased thresholds are good news, what isn’t good news is your taxable income is going up, even if you didn’t earn any more money in 2018. Before, taxpayers were entitled to a dependency exemption of over $4,000 (which was set to increase to $4,150 in 2018) for each person on the tax return. So, a family of four would have had a reduction of their taxable income of $16,600 in 2018, even if they didn’t itemize. Remember earlier when we were talking about deductions versus credits? That is the same as a $4,150 credit (dollar for dollar reduction in the tax bill) for someone in the 25% tax bracket. Now, the personal exemption is GONE.
The Tax Cuts and Jobs Act (TCJA) has some great new changes, there are others that may cause a bigger pinch than some realize. I fully recommend that everyone take advantage of the calculators on www.IRS.gov and prepare for the changes that are coming.