The 2018 Federal Child Tax Credit

The New and Improved Child Tax Credit in 2018

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Parents and guardians who can claim their children as dependents for tax purposes are eligible for several tax credits. One of these is the Child Tax Credit, available simply because you support one or more dependent children during the tax year.

It was worth up to $2,000 per child in tax year 2018. This is an increase from 2017 when the top credit was just $1,000. The Tax Cuts and Jobs Act (TCJA) made some significant improvements to the credit when it went into effect in January 2018.

Not all taxpayers will qualify for the whole $2,000 credit, but the TCJA made some changes in this respect as well, and more taxpayers can be expected to qualify now—at least through 2025 when the TCJA potentially expires.

Child Tax Credit Income Limitations and Phaseouts

Like some other tax credits, the Child Tax Credit is gradually reduced as a taxpayer's income increases. This "phaseout" began with the following thresholds in 2018:

  • $400,000 for married couples filing joint returns
  • $200,000 for all other taxpayers

Compare this to the rules in place for the 2017 tax year. The beginning phase-out limit for married taxpayers filing jointly was just $110,000 in 2017. It was a mere $55,000 for married taxpayers who filed separately, and $75,000 for all other taxpayers.

These income thresholds are based on your modified adjusted gross income (MAGI), not necessarily your entire earnings. Many taxpayers’ MAGIs are the same as their adjusted gross incomes (AGIs). You can calculate your MAGI by adding back certain deductions you might have taken to arrive at your AGI, such as for IRA contributions or half the self-employment tax.

The tax year is the same as the calendar year for the majority of American taxpayers. It begins on Jan. 1 and ends on Dec. 31. Although some sole proprietors and others elect to use a fiscal year accounting period for tax purposes, all tax years mentioned here are measured calendar years.

How the Phaseout Works

The Child Tax Credit is reduced by $50 for each $1,000 that your MAGI exceeds the above thresholds. So, if you're married and you file a joint return, and if you report a MAGI of $401,000, your child tax credit would drop from $2,000 to $1,950 because you'd lose $50 for the additional $1,000 you earned over $400,000.

Qualifying for the Child Tax Credit in 2018

Children must additionally meet several rules to qualify you for the Child Tax Credit:

  • The child must be related to you either legally or biologically as your son, daughter, stepchild, foster child, adopted child, brother, or sister. The child can also be a descendant of any of these relatives, such as a grandchild, nephew, or niece.
  • The child must have lived with you for more than half the tax year.
  • The child was younger than age 17 on the last day of the tax year. This means that he hadn't yet celebrated his 17th birthday by Dec. 31, 2018.
  • The child did not provide more than half his own financial support during the tax year. 
  • The child is a citizen, national, or resident alien of the United States.
  • The child is younger than you
  • The child cannot file a joint tax return with his spouse if he's married, although there are some exceptions to this rule. Check with a tax professional if your child is married and is planning to file a joint return, but this circumstance is rare. 

How Many Children Can Qualify for the Child Tax Credit?

Remember, this tax credit is per child. If you have three children who meet these rules, you get three credits.

A New Rule for Social Security Numbers

Beginning in 2018, your child must have a valid Social Security number at the time you claim this tax credit. You had some leeway with this in the 2017 tax year. It used to be that you could claim the Child Tax Credit retroactively in a later tax year if your child did not yet have a Social Security number by the time your tax return was due, but that provision has been eliminated from the tax code.

The Center on Budgeting and Policy Priorities estimates that this change will prevent as many as 1 million undocumented children from qualifying for the Child Tax Credit.

Claiming Your Child As a Dependent

You could also claim a personal exemption for your qualifying child for the 2017 tax year when you claimed him as a dependent, but the TCJA eliminated personal exemptions from the tax code beginning in 2018 through 2025. Nonetheless, you must still list your child on your tax return as a dependent to qualify for the Child Tax Credit.

A Non-Refundable Credit...Sort Of

The Child Tax Credit was essentially a nonrefundable credit through 2017. It could reduce or eliminate your tax debt if you owed the IRS, but the IRS would keep any portion of the credit that might have been left over. The Internal Revenue Code provided for the Additional Child Tax Credit that was potentially refundable to balance this a bit.  

The TCJA consolidates these two 2017 tax credits—the Child Tax Credit and the Additional Child Tax Credit—into one beginning in 2018. Now up to $1,400 of the $2,000 Child Tax Credit is refundable. If any part of your credit is left over after eliminating your tax debt, the IRS will send you a refund of up to $1,400. And that $1,400 can be expected to increase a little in future tax years because the new tax law indexes this amount to keep pace with inflation.

All this is subject to more rules, of course. You must have earned income, such as from a job or self-employment, to qualify for the refundable portion.

Investment income won’t cut it — that’s considered “unearned.” Unemployment benefits, public assistance, and worker’s compensation benefits are also considered "unearned."

Calculating the Refundable Portion

Even if your income qualifies, you won’t necessarily be receiving that entire $1,400. Remember, the TCJA says the refundable portion of the credit is up to this amount. The credit is equal to 15 percent of your earned income over $2,500, up to $1,400.

A taxpayer would need earned income of approximately $12,000 a year to qualify for and receive the full $1,400 refund: $12,000 less $2,500 is $9,500, and 15 percent of $9,500 works out to $1,425. At $12,000 in earned income, the taxpayer would forfeit that extra $25 because the refundable portion of the credit caps out at $1,400.

That $2,500 earned income requirement is an improvement, however. Through 2017, while the Additional Child Tax Credit still applied, the threshold was $3,000—$500 more, putting it a little further out of reach for some low-income families.

Even at $2,500, some of the neediest American families won’t qualify for the refundable portion, or at least they won't qualify for the entire refundable portion. A family with earned income of just $10,000 would receive $1,125 under the new law.

Yes, raising kids can be expensive, but the tax code still has your back with this and several other child-related credits. You and your children just have to qualify.