Changes to the Child Tax Credit on 2018 Tax Returns

As widely reported, the Tax Cuts and Jobs Act (TCJA) has eliminated all personal exemptions, including the exemption that taxpayers previously received for claiming a dependent on their federal tax return. The elimination of personal exemptions will, in many situations, limit the benefit that a taxpayer will receive this year when claiming a dependent. However, some of the sting that results from the loss of personal exemptions will be eased by the changes that were made to the Child Tax Credit.

The TCJA changed nearly every aspect of this credit by:

  1.  doubling the credit amount to $2,000;
  2.  increasing the maximum refundable credit to $1,400;
  3.  significantly increasing the income eligibility, allowing more middle and higher income taxpayers to receive the credit;
  4.  imposing a requirement that the qualifying child have a valid social security number and
  5.  creating a new non-refundable credit of $500 for certain dependents that do not otherwise qualify for the regular Child Tax Credit

The changes will be viewed by taxpayers as either positive or negative, depending on their individual situation. The doubling of the Child Tax Credit and the increase to the refundable portion of the credit should be a significant benefit to many taxpayers whose dependents were previously eligible to receive the lower credit. Many of these taxpayers should see their credits increase to include the refundable portion of the credit.

A second group that should see a benefit are taxpayers that previously did not receive the credit due to their income level. In prior years, the Child Tax Credit began to phase out for taxpayers whose income exceeded $75,000 for Single, HOH & QW; $110,00 for Married Filing Joint and $55,000 for Married Filing Separate. Once the taxpayer’s income exceeded these threshold amounts by $20,000, the taxpayer was not eligible to claim the Child Tax Credit. Starting in 2018, the new income phase-out amounts will be $400,000 for Married Filing Joint and $200,000 for all other filing statuses. The increase to the income phase-out amounts will allow large numbers of taxpayers previously ineligible, because their income was too high, to claim the credit. For these higher income taxpayers, this specific change will provide a greater benefit than the loss of the personal exemption.

A third group of taxpayers will not benefit by the changes to the Child Tax Credit. The Child Tax Credit could previously be claimed for qualifying children who have an Individual Taxpayer Identification Number (ITIN). Under the TCJA, only children age 16 and under with a valid Social Security Number are qualified children for the $2,000 credit. Beginning in 2018, taxpayers with a dependent who has an ITIN will not be eligible to claim the credit. This group of taxpayers will be significantly impacted by the change.

The final group of taxpayers affected by the changes to the Child Tax Credit are taxpayers with other dependents or children that cannot meet the definition of a Qualifying Children age 16 and under. The TCJA includes a new provision to the Child Tax Credit that allows taxpayers to receive a non‐refundable $500 credit for their other dependents that do not qualify for the $2,000 credit.

The new non-refundable $500 credit is called the Other Dependent Credit (ODC) and it can be claimed by taxpayers who have a child with an ITIN, an older child that is age 17, 18, or a full-time student age 19 to 24. It can also be claimed for other dependents that can meet the qualifying relative test for a dependent. This includes other relatives such as parents, older dependents that cannot meet the definition of a qualifying child and other qualifying relatives. To receive the non-refundable $500 credit, the qualifying relative or child must have a valid Social Security Number, or  an ITIN or an ATIN if the dependent using an ITIN or ATIN was a resident of the United States for more than half of the year.