Beginning in 2018 through 2025, changes in the Child Tax Credit (CTC) made by the 2017 Tax Cuts and Jobs Act (the TCJA) make the CTC more valuable and allow more taxpayers to benefit from it. The CTC applies to taxpayers with children under the age of 17 (“qualifying children”), and there’s also a new credit for other dependents.
Pre-2018 rules for the CTC. Under the pre-TCJA law, the CTC 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 your tax liability, it resulted in a refund of up to 15% of your earned income (e.g., wages, or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s social security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.
From 2018 – 2025, doubling of the CTC to $2,000 for each qualifying child. Beginning in 2018, the CTC is doubled to $2,000 for each qualifying child under the age of 17. Thus, for example, a taxpayer with four qualifying children will be entitled to a credit of $4,000.
From 2018 – 2025, refundable portion of the CTC is increased and earned income threshold is decreased. The refundable portion of the credit is increased to a maximum amount of $1,400 per qualifying child. In addition, the earned income threshold for determining refundability is decreased to $2,500 (from the $3,000 amount that was in effect before the TCJA was enacted). The $500 credit for dependents other than qualifying children (see next paragraph) is nonrefundable.
From 2018 – 2025, $500 nonrefundable partial credit is also allowed for qualifying dependents (other than qualifying children). Taxpayers are now allowed a new $500 credit (per dependent) for any dependents who are not qualifying children under the age of 17. This is referred to as the “family credit.” There is no age limit for the $500 credit, but the tax tests for dependency must be met.
From 2018 – 2025, the AGI “phase-out” thresholds for the CTC are substantially increased. 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. The threshold is $200,000 for all other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.
Claiming the CTC, from 2018 – 2025. To claim the $2,000 credit for a qualifying child, you must now include the child’s Social Security number (SSN) on your tax return. Under pre-TCJA law, taxpayers could include either the child’s SSN or the child’s individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN). If a qualifying child does not have an SSN, you will not be able to claim the $2,000 CTC, but you can claim the $500 credit for that child, using an ITIN or ATIN. The SSN requirement does not apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you are claiming a $500 credit.
Some final points. If you expect the CTC to reduce your income tax, you may want to reduce your wage withholding. You can do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer.
Please contact us if you have any questions or would like to discuss this issue further.