More Families May Be Eligible for the Child Care Credit/Dependency Exemption

BY PHIL GOLDSTEIN

Managing Partner, Goldstein, Lieberman and Co.

The Tax Cuts and Jobs Act (TCJA) made significant changes to the child credit. This credit is generally available to taxpayers with children under the age of 17, but the new law adds a new (smaller) credit for other dependents. Here are the details.

Old Rules – Under prior tax law, the child credit was $1,000 per “qualifying child.” But the credit was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000. The phaseout thresholds were $75,000 for unmarried taxpayers and $55,000 for married couples filing separately.

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 (for example, 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.

Important: These “old” rules still apply to tax returns that you’re filing for the 2017 tax year (which must be filed or extended by April 17, 2018).

New Law – For 2018 through 2025, the TCJA doubles the child credit to $2,000 per qualifying child under the age of 17. It also allows a new credit of $500 for any dependent who isn’t a qualifying child under age 17. There’s no age limit for the $500 credit, but the tax tests for dependency must be met.

The TCJA also substantially increases the phaseout thresholds for the credit. For 2018 through 2025, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of $1,000) by which their AGI exceeds $400,000 (up from $110,000 under prior law). The threshold is now $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. But beware these phaseouts are notindexed for inflation.

In addition, under current law, the refundable portion of the credit has been increased to a maximum of $1,400 for each qualifying child. And the earned income threshold has been decreased to $2,500 (from $3,000 under prior tax law) — which could potentially result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

The new tax law isn’t all good news for families. For the 2017 tax year, you can claim an exemption of $4,050 from taxable income for each qualifying dependent (subject to phaseouts at higher income levels). But that deduction has temporarily been suspended, for 2018 through 2025

Many families still expect to come out ahead under the new law, however. That’s because credits reduce your tax bill dollar for dollar. By contrast, exemptions and deductions only reduce your taxable income, which is the amount that you’re taxed on.

And if you have any questions, make sure to speak to your tax advisor.