Tax law changes affecting families in recent years have been a mixed bag. For instance, the Tax Cuts and Jobs Act (TCJA) eliminates dependency exemptions for children you support, effective for 2018 through 2025. But there’s a trade-off of sorts: The TCA also increases and enhances the Child Tax Credit (CTC) for children under age 17.
Notably, the maximum CTC you can claim on your 2020 return is $2,000 for each qualifying child, of which $1,400 is refundable.
Background: Prior to the TCJA, the maximum CTC was $1,000 per qualifying child, subject to a phase-out starting at $75,000 of modified adjusted gross income (MAGI) for single filers and $110,000 of MAGI for joint filers. The credit was refundable up to the lesser of $1,000 or 15% of taxable income above $3,000.
But the TCJA has raised the stakes. For 2018 through 2025, the credit is doubled to $2,000 per qualifying child. Furthermore, up to $1,400 is now refundable as an “Additional Child Tax Credit.” Best of all, the phase-out begins at $200,000 for single filers and $400,000 for joint filers—much higher thresholds than before.
The TCJA also allows a new $500 credit for each dependent who is not a qualifying child under age 17.
To qualify for the CTC, you must include on your 2020 tax return the name and Social Security Number (SSN) for each dependent you’re claiming the tax credit for. In addition, you (and your spouse, if filing jointly) must list your taxpayer identification numbers. Finally, the CTC is available for a child only if he or she—
- Is your daughter, son, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister or their descendant.
- Is under age 17 at the end of the tax year.
- Does not provide more than half of their own financial support during the tax year.
- Has lived with you for more than half of the tax year (subject to certain exceptions).
- Can be claimed as a dependent on your tax return.
- Does not file a joint tax return for the year (except when filing to claim a refund of withheld income taxes or estimated taxes paid).
- Is a U.S. citizen, U.S. national, or U.S. resident alien.
- Has an SSN issued by the Social Security Administration (SSA) that is valid for employment.
For each $1,000 that you exceed the income threshold (rounded up to the nearest $1,000), the CTC amount is reduced by $50 until it is completely exhausted. Any remaining amount is further reduced if your tax liability is less than the potential CTC amount. If your tax exceeds this amount, you can claim the full credit. Otherwise, the credit is limited to the amount of your tax. As a result, you may benefit from a refund of part of the excess credit through the Additional Child Tax Credit.
Moral of the story: Obviously, the CTC rules are more complicated than first meets the eye. Discuss your personal situation with your professional tax advisor.
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