Expanded Sec. 152 for Dependents

The Tax Cuts and Jobs Act broadened the Child Tax Credit and introduced some big changes to more qualifying taxpayers.

Child Tax Credit

If you have children or dependents under the age of 17, you may be able to annually reduce your federal tax bill by up to $2,000 (an increase of $1,000) for each child or dependent. The tax reform bill also increased the income limit amount and added other new qualifying requirements.

The new income limit amount determines how much of the credit a taxpayer will receive. If an individual taxpayer earned between $2,500 and $200,000, the taxpayer may receive the entire $2,000 credit per child. For income levels above $200,000 for individuals and $400,000 for married filers, the credit is phased out and only a portion of the credit will be available to higher-earning taxpayers.

As a reminder, tax credits are different than tax deductions, as credits are subtracted directly from the total tax bill owed to the IRS. If a taxpayer owes $15,000, earns under $200,000 filing single and claims two children under 17 years of age, $4,000 can be used to directly reduce the amount owed, for a new total of $11,000. On the other hand, a tax deduction is a reduction in the total income amount subject to income tax.

Another big change in the reform bill is the child tax credit is refundable up to $1,400, meaning if a taxpayer does not owe money to the IRS (their liability is below zero), the IRS will send the remaining amount of the credit.

Surviving Spouse

Under the new provisions, Sec. 152 also expanded the definition of a dependent by creating two categories, the “qualifying child” and the “qualifying relative.” This change broadened the definition of taxpayers filing as a surviving spouse by easing the dependency requirements. If a spouse passes away, the surviving spouse may qualify to use the tax rate schedule for married taxpayers filing jointly for two years after the year of the deceased spouse’s passing. Certain qualifications and limitations apply to each situation.

Credit for Dependents Over 17

The new child tax credit rules not only apply to children and dependents under the age of 17, but there is a new credit for older dependents as well. The taxpayer-friendly credit of $500 for dependents over the age of 17 years old and other qualifying relatives can be applied under the expanded Sec. 152 definition.

If you are in the midst of finalizing your 2018 returns for the upcoming extension deadline or looking to start year-end tax planning for the 2019 tax season, please contact your advisor at (805) 963-7811 should you have any questions regarding the new child tax credit as it applies to your family.