New Child Tax Credit: Will You Benefit?

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Do you have children? The Child Tax Credit was one of last year's most hotly-debated topics. Several senators, including Marco Rubio, called for a comprehensive overhaul before approving the Tax Cuts and Jobs Act bill. Ultimately, substantial changes were made.

Here’s how the changes to the Child Tax Credit may impact you:

The Child Tax Credit Defined

Here’s the simple definition: The Child Tax Credit is cash back into the pockets of American parents when they file their tax returns. If you qualify for the tax credit, the taxes you owe the IRS will be reduced.

Comparing The Old With The New

If you have never been able to take advantage of the credit, you may be pleasantly surprised to learn you’ll be eligible this year. And if you were eligible under the previous bill, you could see an increase in your discount. Here are some of the main differences between last year’s tax credit and the new version.  

Eligibility:

  • Old Rule: Your family’s modified adjusted gross income (MAGI) had to be $110,000 or less ($75,000 for singles).
  • New Rule: Your family’s MAGI can be $400,000 or less ($200,000 for singles).

If your income is above these thresholds, your benefit amount will decrease by $50 for every additional $1,000 you earn. This is called a phase-out schedule.

Clearly, a significant number of previously ineligible American families will receive the tax benefit now that the income criterion is nearly four times the previous limit. However, eligibility is based on other qualifiers. Income is just one of them. In short, if the child is a U.S. citizen, under age 17, has lived with you for at least half the year, is related to you (son/daughter, stepchild, foster child), and is financially dependent on you, you should be eligible.

In addition, some caretakers are now eligible for up to $500 in nonrefundable credit. If you do not claim the Child Tax Credit, but you have a parent, sibling, nephew, aunt, or child age 17 or older who is dependent on you, then you’re eligible for that $500 tax credit.

Benefit Amount:

  • Old Rule: $1,000 per child
  • New Rule: $2,000 per child

When you combine the increased income phase-out along with doubling the benefit amount, the new changes can have quite an impact. Here's an example: Let's say you are married, file a joint tax return, have three young children, and a combined income of $150,000. Under the old law, you are not eligible for a benefit. Under the new law, your taxes are reduced by $6,000!

Refundable Credits:

  • Old Rule: $0 (in most cases)
  • New Rule: $1,400

What if your tax credit exceeds your tax liability? Under the old law, the Child Tax Credit was nonrefundable. Your tax bill was simply reduced to zero and you lost all remaining unused tax credits. A few taxpayers were eligible for a refund of 15 percent of earnings above $3,000, but only if they were in the 10 percent tax bracket.

Under the new law, everyone who receives the tax credit is eligible for up to $1,400 in refundable credit, if their credit exceeds their tax liability. In other words, the new law allows parents to receive a benefit even if they don’t have much tax liability.

The Fine Print

A few notable facts:

  • The new Child Tax Credit changes are subject to the 2025 sunset provision. If not extended, the rules will revert back to the previous version.
  • The new income limits for the Child Tax Credit are not subject to inflation.
  • The new Tax Cuts and Jobs Act eliminated personal exemptions, which previously reduced taxable income by $4,050 per dependent in 2017.

The Bottom Line

The controversial Child Tax Credit overhaul may have been the deciding factor in the passage of the Tax Cuts and Jobs Acts. However, one thing is certain: This amended tax credit allows tax relief for more middle-income, single parents and married American families. Negotiating legislative policy will always require some give-and-take, but hopefully this law change will have a significant and positive impact.

Evan D. Bedel, CFP, is a Financial Planner and heads Generation NeXt services for Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit the Bedel Financial website at bedelfinancial.com or email Evan.

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