Through 2017, taxpayers with children were entitled to an exemption of $4,050 for themselves and each of their children. Taxpayers were also entitled to a Child Tax Credit of $1,000 per child under the age of 17.
The Child Credit was phased out for single payers with an adjusted gross income of more than $75,000 and joint filers with an AGI of more than $110,000. Taxpayers were entitled to receive a refund of a portion of the Child Tax Credit if their tax liability did not exceed the amount of their exemptions, deductions and credits.
Under the new law, the personal exemption is repealed, and replaced by a larger standard deduction of $12,000 for single filers and $24,000 for joint filers. The Child Tax Credit is retained and increased to $2,000 per child under 17, with up to $1,400 being refundable. A refund is only available to taxpayers whose tax obligation is less than the taxpayer’s deductions and credits. To obtain a refund, the taxpayer must also have a Social Security number and at least $2,500 in earned income.
The good news is that, under the new tax law, the phase out of the Child Tax Credit does not begin until the single filer reaches $200,000 in adjusted gross income, or $400,000 for those filing a joint return.
Because of the increase in the amount taxpayers can earn before the Child Tax Credit phases out, more taxpayers will be able to use the Child Tax Credit to reduce their tax burden. The following is an illustration of the potential effect of the new tax act on a married couple both aged 45 with two children, with an adjusted gross income (“AGI”) of $150,000:
AGI is 150,000
less: Standard Deduction of 12,700
less: Exemptions of 16,200 (4x 4,050)
less: Child Tax Credit of 0
Tax Owed is 21,753
AGI is 150,000
less: Standard Deduction of 24,000
less: Exemptions of 0 (repealed)
less: Child Tax Credit of 4,000
Tax Owed is 15,599
The example above is limited to the stated assumptions. There are numerous other changes in the tax code requiring individual analysis to determine the effect of these changes on the individual taxpayer.
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