The new child tax credit

The Tax Cuts and Jobs Act was signed into law at the end of 2017. One of the tax reform changes includes a new child tax credit. While the credit is not technically new, there are updates to the provision. Here we outline the history of the credit and how you’ll claim your qualifying children for the 2019 tax year.

The child tax credit, or CTC, was introduced by 1997 legislation and was first available in 1998. It started as a small, nonrefundable credit of $400 for each qualifying child under 17. In the last 20 years, it has undergone many changes. Under pre-TCJA law, the CTC was worth up to $1,000 per qualifying child, was refundable for taxpayers with earned income of at least $3,000, and phased out (decreased) for taxpayers with modified adjusted gross income above $75,000 ($110,000 for joint filers).

Changes you should know about

Under the Tax Cuts and Jobs Act, the following new child tax credit rules went into effect in 2018 and apply to 2019 and 2020 tax returns:

• The Child Tax Credit under tax reform is worth up to $2,000 per qualifying child. The age cutoff remains at 17 (the child must be under 17 at the end of the year for taxpayers to claim the credit).

• The refundable portion of the credit is limited to $1,400. This amount is subject to inflation adjustments but remains at $1,400 for 2019.

• The earned income threshold for the refundable credit is lowered to $2,500.

• The child must have a valid SSN to qualify for the $2,000 Child Tax Credit.

• The beginning credit phaseout for the child tax credit increases to $200,000 ($400,000 for joint filers). The phaseout also applies to the new $500 credit for other dependents.

Phaseout example

The credit phases out by $50 for each $1,000 of modified adjusted gross income over the threshold. To illustrate how the child tax credit phaseout works, let’s say a married couple’s income is $410,000 and they have one child. Because their income is over the phaseout threshold, the amount of the child tax credit they could take would be reduced to $1,500.

• $410,000 – $400,000 = $10,000

• $10,000 ÷ $1,000 = 10

• $50 × 10 = $500 phaseout amount

• $2,000 – $500 = $1,500 child tax credit

New eligibility definitions

Prior to the TCJA, the taxpayer who was eligible to claim the child’s dependent exemption was also the one eligible to claim the CTC. In turn, the taxpayer and child had to meet several “tests” for the one to be considered the dependent of the other.

The TCJA eliminates the dependent exemption itself but retains the definition of dependent to claim the new child tax credit and other child- or dependent-related tax benefits. For Child Tax Credit reform purposes, this will usually mean that the child must be related to the taxpayer in one of several ways (son, daughter, grandchild, etc.), must live in the taxpayer’s home more than half the year, and must not provide more than half of his or her own support. Special rules apply if the parents are divorced or legally separated.

As under previous law, strict due diligence requirements apply for tax professionals who prepare returns with the refundable Child Tax Credit. All changes to the new Child Tax Credit expire after December 31, 2025.

For more information or advice about the child tax credit changes and claiming dependents, make an appointment with tax professionals who can help you.