23 Jan Trump Tax Law Changes: The Child Tax Credit
In continuing with our recent blogs, explaining some of the changes that will come with the Republican Party’s new tax bill, we wanted to touch on yet another part of the tax law that will impact a significant portion of taxpayers: the Child Tax Credit. The new tax law makes big changes to this aspect of your tax filings, so here’s how you can expect your next tax return to differ from the one you’re filing this year. If you have any questions about this or any other tax credit, please contact a tax professional in Provo.
Increase to Child Tax Credit
Under previous tax laws, taxpayers could claim a tax credit of up to $1,000 for each qualifying child under the age of 17. For tax years 2018 through 2025, the Child Tax Credit is increased to $2,000 per qualifying child under age 17. The law also adds a $500 nonrefundable credit for certain non-child dependents.
Changes to Phase-Outs
In prior years, tax law provided a phase out for the Child Tax Credit. For taxpayers earning over a certain adjusted gross income (AGI), the amount you could claim per child was reduced. The phase-out earning levels were: $75,000 for single filers, $110,000 for married filers, and $55,000 for married individuals filing separately. For every $1,000 earned over the applicable threshold, the amount a taxpayer could claim was reduced by $50, until the tax credit is completely phased out.
Phase-outs are still a part of the new tax law, but the AGI you must earn before having the tax credit reduced is significantly increased. Now, married taxpayers filing jointly earning over $400,000 and other taxpayers earning over $200,000 may see a reduction in their Child Tax Credit, at the rate described above.
SSN Required for Credit
Under the old tax law, taxpayers claiming the Child Tax Credit could provide either a Social Security number (SSN) or a valid Taxpayer Identification Number (TIN) for every child for whom they claimed a credit.
Under the new Republican tax bill, only SSNs are acceptable. No credit will be given to a taxpayer unless the child’s SSN is provided.
Refundable and Nonrefundable Rates
Under the old tax law, the Child Tax Credit was a non-refundable credit. This meant that the credit could reduce what you owed, but would not provide you with a return. However, the old law also offered an “additional Child Tax Credit” in the event that the credit exceeded your tax liability. In these cases, taxpayers could qualify for a refundable credit equal to 15% of earned income over $3,000.
The new tax bill, however, factors the Child Tax Credit in a very different way. The additional Child Tax Credit is eliminated, and instead, up to $1,400 of each Child Tax Credit is a refundable credit, and the earned income threshold for the refundable portion of the income is reduced from $3,000 to $2,500. In other words, if you owe taxes, the taxes you owe may be reduced by $2,000 per Child Tax Credit. If you have no tax liability, you may be refunded up to $1,400 for each Child Tax Credit you claim.
Of course, every situation is unique, and most families will fall somewhere in the middle, with part of Child Tax Credit being refundable and part of it being nonrefundable, depending on your income level and the number of credits you claim.
Please note that these changes to the Child Tax Credits do not apply to your current tax filings. However, if you have questions about the Child Tax Credit or any other part of your taxes, feel free to reach out to one of our tax professionals in Provo for assistance.