The Child Tax Credit: What Changes for Tax Year 2018?
Tax Reform Didn't Eliminate This Popular Tax Credit
When the Tax Cuts and Jobs Act was signed into law on December 22, 2017, it upended the U.S. tax code in a lot of ways. The dust is still settling, and that can make it a little challenging to prepare your return for tax year 2018 in 2019. One big change affects the Child Tax Credit.
The credit wasn’t eliminated by the TCJA as several other tax perks were; it was actually improved upon somewhat. New rules apply from tax year 2018 through tax year 2025. They'll affect the tax return you’ll file in 2019 for the 2018 tax year.
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.
The Maximum Credit
The maximum child tax credit topped out at $1,000 per child through December 25, 2017. The TCJA increased that to $2,000 per child beginning in tax year 2018, but this doesn’t necessarily mean that all qualifying taxpayers will receive this much. Certain terms and conditions can whittle away at this cap.
One aspect of the Child Tax Credit has not changed—you must have a qualifying child dependent and the rules for exactly who qualifies are somewhat intricate. The child cannot yet have turned 17 by the last day of the tax year, and he must be related to you. But the definition of “related” in this case is broader than you might expect.
The list of qualifying children includes biological and adopted children, stepchildren, foster children living in your care, siblings, stepsiblings, or a child of any of these individuals.
If your qualifying child has any income of his own, he can't pay for more than half his own support needs during the tax year. In most cases, he must have lived with you, in your home, for more than half the year, but temporary absences such as living away at school for a period of time don't count.
Your child must be a U.S. citizen, a U.S. national, or a U.S. resident alien. He must have a Social Security number, and you must provide it to the IRS when you file your tax return and claim the credit. And you must claim your child as a dependent on your tax return.
The Social Security number requirement is a new development, too. It used to be that you could claim the Child Tax Credit retroactively in a later year if your child did not have a Social Security number by the time your tax return was due. That provision was eliminated beginning with tax year 2018. The Center on Budgeting and Policy Priorities has estimated that this will eliminate as many as 1 million undocumented children.
The Credit for Other Dependents
Beginning with tax year 2018, you might also be able to claim an additional $500 credit for your non-child dependents. The TCJA calls this the “Credit for Other Dependents,” although it's been familiarly referred to as the "Family Tax Credit." All the old rules for claiming adult dependents on your tax return still apply. They’re largely the same as they are for qualifying child dependents, covering those who don’t meet the age requirement for the Child Tax Credit.
The Refundable Portion of the Child Tax Credit
The Child Tax Credit was essentially a nonrefundable credit through the 2017 tax year. If you owed the IRS, it could reduce or eliminate your tax debt, but any portion of the credit that might have been left over would just disappear. To balance this, the Internal Revenue Code provided for an Additional Child Tax Credit that was potentially refundable.
The TCJA eliminated the Additional Child Tax Credit…sort of. It consolidated these two 2017 tax credits—the Child Tax Credit and the Additional Child Tax Credit—into one. Beginning with tax year 2018, up to $1,400 of the $2,000 Child Tax Credit can be 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 years because the new tax law indexes it 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."
And 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 refund is actually equal to 15 percent of your earned income over $2,500. 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.
But that $2,500 earned income requirement is an improvement. 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 very 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, if they don't have earned income of at least $12,000 or so. A family with earned income of just $10,000 would receive only $1,125 under the new law. A family getting by on some form of unearned income would receive nothing.
Child Tax Credit Phase-Outs
The Child Tax Credit is also subject to phase-outs for taxpayers who earn too much money. When their incomes reach a certain point, the overall credit is reduced, and it’s eliminated for those whose incomes surpass an upper limit.
But the TCJA changed this rule, too, in favor of wealthier families. As of the 2018 tax year, the phase-out begins for married taxpayers at a pretty significant $400,000. They can earn this much without losing any of their Child Tax Credit. The phase-out begins for all other taxpayers at $200,000.
Each $1,000 earned over these amounts reduces the Child Tax Credit by $50. These phase-outs apply to the Family Credit as well.
Compare this to the Child Tax Credit 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.
MAGI vs. Gross Income
These income thresholds are based on your modified adjusted gross income or MAGI, not your entire earnings. Many taxpayers find that their MAGIs are the same as their adjusted gross incomes, which can be found on line 7 of the new 2018 Form 1040 tax return. You can calculate your MAGI by adding back certain deductions you might have taken to arrive at your AGI, such as for IRA contributions, half the self-employment tax, or rental losses.
Overall, the more you earn, the more you’ll benefit from this tax credit going forward—at least until your income tops $200,000 or $400,000. And if you have no earned income at all, the Child Tax Credit can't help you.