The Tax Cuts and Jobs Act (TCJA) of 2017 has increased the amount of the child tax credit and allowed for more individuals to be eligible for the credit.
This column discusses the details of the expanded child tax credit, including who is eligible for it and the amount of the credit.
Individuals with one or more qualifying children may be able to claim a child tax credit of up to $2,000 per qualifying child, an increase from $1,000 per qualifying child in 2017. The child tax credit is generally a nonrefundable tax credit. This means the total tax credit cannot exceed an individual’s federal income tax liability. The child tax credit is in fact limited to an individual’s regular income tax liability plus alternative minimum tax (AMT) liability. However, a portion of the credit is refundable for certain individuals. This means that these individuals will receive a portion of the tax credit even if the credit exceeds the individual’s federal income tax liability.
The definition of a “qualifying” child for the child tax credit is the same as that for the dependency exemption. Note that TCJA eliminated the exemption deduction for dependents for the years 2018 – 2025. This means that in the case of a divorced couple, the custodial parent’s releasing the dependency exemption for a child to the noncustodial parent does not entitle the custodial parent to an exemption deduction. But it does make the noncustodial parent eligible for the child tax credit with respect to that child.
The definition of a qualifying child for the child tax credit is the same as that for the dependency exemption with two modifications: (1) The child must be under age 17; and (2) the child must be a US citizen, resident alien or national (being a resident of Canada or Mexico is not sufficient). Also, the qualifying child must be claimed as a dependent and have a Social Security number.
Adjusted Gross Income (AGI) “Phase-Out”
The child tax credit is phased out $50 for each $1,000 or fraction thereof of AGI above the beginning phase-out amount. The TCJA changed the AGI threshold phase-out amount for the child tax credit. The beginning phase-out amounts for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026 are $400,000 for married filing jointly and $200,000 for all other filers. These phase-out amounts are not indexed for inflation.
Calculating the Child Tax Credit
A set of questions in the Form 1040 instructions determine whether the child tax credit is calculated using the Child Tax Credit and Credit for Other Dependents Worksheet (shown below) or the worksheet shown in IRS Publication 972 (Child Tax Credit), which can be downloaded at www.irs.gov/pub/irs-pdf/p972.pdf.
Child Tax Credit and Credit for Other Dependents Worksheet (2018)
Caution: Use the worksheet in IRS Publication 972 (Child Tax Credit) if any of the following apply:
- The taxpayer is claiming the adoption credit (Form 8839), mortgage interest credit (Form 8396), District of Columbia first-time home-buyer credit (Form 8859) or residential energy efficient property credit (Form 5695).
- The taxpayer is excluding income from Puerto Rico or filing Form 2555 or Form 2555-EZ (relating to foreign earned income).
- The taxpayer is filing Form 4563 (exclusion of income for residents of American Samoa).
For most individuals, the child tax credit is the smaller of:
- $2,000 multiplied by the qualifying children less the applicable phase-out amount, or
- Regular tax liability plus alternative minimum tax liability reduced by the foreign tax credit and other nonrefundable personal tax credits. This includes the child and dependent care and education tax credits.
Credit for Other Dependents
The TCJA expanded the child tax credit to include a credit for certain other dependents. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, a $500 credit is allowed for each dependent of an individual other than a qualifying child. The nonrefundable credit applies to a child under age 19, a full-time student under age 24, a disabled child of any age or other qualifying relatives. To qualify, an individual must be a US citizen, a US national, or a US resident. Note that a child that is ineligible for the full $2,000 child tax credit because he or she does not have a Social Security number may allow the individual to claim the $500 child tax credit instead.
Additional Child Tax Credit
A portion of the child tax credit is refundable for certain individuals. Those individuals who have more than $2,500 of earned income (salary/wages or self-employment net profit) complete IRS Schedule 8812 in order to compute the refundable portion of the child tax credit. This is called the additional child tax credit.
The additional child tax credit is the smaller of: (1) the amount of the child tax credit after reducing the regular tax and the alternative minimum tax to zero; or (2) 15 percent of the individual’s earned income in excess of $2,500. There are modifications if individuals with three or more qualifying children. For more information, affected individuals should check IRS Publication 972 at www.irs.gov/pub/irs-pdf/p972.pdf.