Child tax credit

[jyeh74]

I was venting about how the standard exemption of $4050 per dependent is eliminated in 2018.  For a family of four, that is $16,200 of personal exemptions that goes away for dependents.

A friend was saying that the child tax credit replaces it.  Is the child tax credit new for 2018?  How much is it for each child?  I still lose out on my own $4050 exemption for myself.  I never paid attention to it.  But say for someone who is HoH and making over $75k doesn’t it get phased out?  So let’s say you make $100k-$150k as HoH , the child tax credit doesn’t even apply right?  There is no way that this credit makes up for $4050 per dependent that we are losing or on.  Someone explain his reasoning.

[AnthonyC · Accepted solution]

The child tax credit is not new for 2018 - but it will be expanded quite significantly.  

In the past, the credit was worth up to $1,000 per child and was split between two credits - one that reduced your tax liability and one that was possibly refundable (added monies to your refund).  There was also a phaseout threshold that could reduce or eliminate your CTC (for HOH this started at $75,000).

Now, for 2018, this credit will be worth up to $2,000 per child with up to $1,400 of the credit refundable.  But, more importantly for you, is that the credit phaseout threshold has been increased to $200,000 for single and HOH filers ($400,000 for MFJ).  So, in the past, you were likely not receiving any CTC in the scenario above, but you would be eligible for the credit now.

Also, keep in mind that a credit is more valuable than a deduction or exemption as a credit reduces your tax liability dollar for dollar.  An exemption only reduces the amount of income you pay tax on - so you only save tax liability at your marginal rate.  Also, keep in mind the standard deduction will be doubled, which will help make up for the loss of personal exemptions (of course, if you had significant itemized deductions before, then it may not).

There are too many variables on any one tax return to give any definitive answers, but for most taxpayers who are eligible for the revised CTC, the credit will make up for the lack of exemptions and a lot of families will come out better (especially combined with the standard deduction).  

However, there are definitely going to be scenarios where this is not the case.  The clearest example is if you have children who are NOT under 17 years old (i.e dependents in college).  These children would still not qualify for the CTC under the old or new rules.  So, now you are losing your personal exemptions for these dependents and not making up for it with the CTC.  Another scenario would be those who claimed dependents who are not children like aging parents or other relatives.  There is a smaller $500 nonrefundable "family" credit in the new law for these scenarios to help make up the difference, but it may not have the same impact as the prior exemptions.

[jyeh74]

Correct, for dependents over 17, you lose out on the $4050 per dependent.  That is a shame.  Even the smaller $500 family credit is not going to make up for this loss.  When you have a few of these dependents, the personal exemptions of $4050/dependent are significant to reduce taxable income!

You mentioned that for 2018, this child tax credit will be worth up to $2,000 per child with up to $1,400 of the credit refundable.  How does that work?  Does the $2000 offset my taxable income?  What if HoH earners make over $200k?  How does the phase out work and at what point is it phased out to zero (so you don't even get the credit)?  Is the $1400 added directly to my refund dollar for dollar?  What does "up to" mean and how is it phased out?

[AnthonyC]

Here's a basic example of how the credit works using some random numbers:  You have $30,000 in taxable income and have a 10% tax rate, so you would have $3,000 in tax liability.  With an exemption, you would get to deduct ~$4,000 from income bringing income down to $26,000, resulting in a $2,600 tax liability.  With the new CTC, if you had one child you would be able to reduce that tax liability all the way to $1,000 (the $2,000 credit offsets the tax liability directly).  If you have two children, you would get to reduce your tax liability all the way to zero and the remaining $1,000 would get refunded to you in your refund.  

The phase-out starts at $200,000 and gets reduced by $50 for every $1,000 in income you go over that threshold, up until you reach the cut-off point, which is $240,000.  So, at $240,000 for single and HOH, you would not get any CTC.  And, the "up to" refers to you do need to have a certain amount of income to receive the full refundable portion (the refundable portion would equal 15% of your income after $2,500 up to the full credit).

[jyeh74]

Thank you for the detailed explanation.  That helps.  So in TT 2017, do we have to do anything differently to get the CTC?  Any special section I have to manually go to to enter all my dependents under 17?

Also for dependents over 17, do we just lose out on the $4050 for each dependent other than the $500 family credit?  Again, any special section I have to manually go to to enter my dependents over 17?

[AnthonyC]

These changes don't apply to this tax return you are filing right now.  It will apply for the 2018 tax year, which is the tax return you will file next year in 2019.  So, for now, you will still get those personal exemptions and there is nothing you have to do.

[jyeh74]

OK.  So for 2018, will TT automatically apply these changes or do we anticipate we have to enter then manually in a separate section within TT2018?

[AnthonyC]

I would anticipate that TurboTax will automatically apply all changes.  It should be handled the same way it is now - you will enter all your personal information and your dependents and answer some questions about them and TT will handle the rest.