For 2018-2025, the Tax Cuts and Jobs Act (TCJA) doubles the maximum child tax credit (CTC) from $1,000 to $2,000 per qualifying child.
The new law also substantially increases the income thresholds for the phase-out rule that can reduce or eliminate your rightful CTC. That means many more families will fully qualify for the bigger credit. That’s good news.
Next, the TCJA established a new credit of up to $500 for dependents who are not qualifying children (a qualifying child must be under age 17). Under prior law, no credit was allowed for dependent kids who were age 17 or older because they did not meet the definition of a qualified child.
The new law made some other changes to the CTC rules. Here’s the story.
Much more-generous CTC rules for 2018-2025
For 2018–2025, the TCJA doubles the maximum CTC from $1,000 to $2,000 per qualifying under-age-17 child. However, the new law says you cannot collect the CTC unless your Form 1040 includes the child’s Social Security Number (SSN). And that SSN must be issued before the due date of your return.
For 2018–2025, the refundable portion of the CTC equals 15% of earned income in excess of $2,500. But the refundable amount is limited to a maximum of $1,400 for each qualifying child. You can collect the refundable amount even if you have no federal income tax liability. It’s free money! All you have to do to collect it is file your federal income tax return.
For 2018–2025, the TCJA increases the CTC phase-out threshold to $400,000 of modified adjusted gross income (MAGI) for married joint-filling couples (up from only $110,000 under prior law) and $200,000 of MAGI for everybody else (up from $75,000). MAGI means your regular adjusted gross income (AGI) from the bottom of Page 1 of Form 1040 increased by exclusions for certain income from outside the U.S. (fairly unlikely to apply to you).
The CTC is reduced by $50 for each $1,000 (or fraction thereof) by which your MAGI exceeds the applicable threshold. For example if you are a single filer with two qualifying children, your tentative CTC is $4,000 (2 x $2,000). But your CTC is fully phased out (eliminated) if your MAGI exceeds $280,000 (excess MAGI of $80,000/$1,000 = 80; 80 x $50 = $4,000).
New $500 credit for dependents who are not qualifying children
For 2018-2015, the TCJA establishes a new $500 credit for dependents (individuals who receive over half their support from you) who are not under-age-17 children.
Qualifying dependents include: (1) a dependent child who lives with you for over half the year and is over age 16 and up to age 23 if the child is a student and (2) a long list of non-child relatives (grandchild, sibling, stepbrother, stepsister, father, mother, grandfather, grandmother, stepfather, stepmother, niece, nephew, uncle, aunt, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law, and others).
In addition, a qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident.
Individuals who are not relatives can be qualifying dependents if they meet the preceding requirements and live with you as a member of your household for the year.
The bottom line
You may be able to reap significant tax savings from the new and improved CTC starting with this year’s return, which you will file sometime next year.