Having children is a joyful and rewarding experience, especially during tax season when Uncle Sam tips his wallet to parents by reducing their federal income taxes. But what happens to families now that the new child tax credit (CTC) is in effect?
Under the revised plan, the amount you can claim for each qualifying child under the age of 17 has increased from $1,000 to $2,000, thanks to the new Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017. It also includes a credit of up to $500 each for your dependents who do not qualify for the child tax credit.
In addition, the maximum additional child tax credit (ACTC)—a refundable credit paid to you only if your CTC is greater than the total amount of income taxes owed—jumped from $1,100 to $1,400, and because the new plan increases the amount of income threshold to $200,000 ($400,000 if married and filing jointly), families who were previously ineligible for the credit are now able to qualify.
Great news, right? Yes, but there’s always a catch—and in this case, there are three.
For starters, because the new plan acts a refundable credit (not a deduction), those hoping to cash in may be disappointed to learn that some or all of their credit was used to pay taxes owed.
Confused? So were we. Below are some examples to help clear the fog.
Eligible parents who claim one child as a dependent, but owe the IRS $2,000 aren’t going to see a penny because the entire CTC ($1,400 of which is refundable, $600 of which is not) will be used to pay the amount owed. On the flip side, eligible parents—claiming one child as a dependent—who owe more than that—say $2,500—may still owe the $500, unless they file an earned income tax credit (EITC) with the IRS.
In fact, the only way to cash out using CTC is if you owe less than the tax credit is worth. For instance, if you owe $800, you’ll only get $600 back from the IRS after the $1,400 refundable portion of your credit is used.
Another potential downside to the new plan is the elimination of personal exemptions. According to CNBC, a loss of this magnitude—$4,050 per taxpayer, spouse and qualifying dependent in 2017—might put a lot of financial strain on those with larger families when they instead must stick to a standard deduction in 2018.
There is also a third provision aimed at undocumented immigrants, requiring taxpayers who use individual taxpayer identification numbers (ITIN) to provide a Social Security number for each child in order to qualify for the credit.
The bottom line: If you’re married with kids (but not too many), have a steady job (that pays the right amount) and are a legal citizen of the United States, you might have a shot at getting a decent refund next year. But try not to get carried away because there’s no telling what will happen between now and 2025, when the child tax credit expires.
In the meantime, keep your eyes peeled for the new 2018 Form 1040—a simpler version that the IRS hopes “all 150 million taxpayers” will be able to use this tax season.