Note: The 2018 tax bill didn’t make substantive changes to the EITC. For EITC information, click here.
A major pro-taxpayer enhancement in the 2018 tax bill was a vast expansion of the former Child Tax Credit (CTC).
Under prior law, taxpayers were allowed a $1,000 tax credit for each qualifying dependent child under the age of 17 at the end of the tax year. This credit began to phase out when the taxpayer’s AGI exceeded $110,000 for MFJ, $55,000 for MFS, and $75,000 for all other filing statuses. Part of the credit was refundable, even if no tax was owed, in certain circumstances. No tax credit was allowed for other dependents.
The new law doubles the CTC to $2,000 per qualifying child. Additionally, the phase-out threshold is vastly expanded to a whopping $400,000 of MAGI for MFJ filers, and $200,000 for all other filing statuses. Up to $1,400 per qualifying child is refundable (paid in cash as a ‘refund’) if the taxpayer has sufficient earned income, but owes no income tax. For dependents who don’t meet the requirements of qualifying child, a new Family Tax Credit (FTC) of $500 per dependent is available. The FTC is not refundable.
The elimination of the personal exemption deduction (scheduled to be $4,100 per taxpayer, spouse and dependent in 2018) changes the landscape for all taxpayers. Mitigating this change are the increase in standard deduction, rate reductions, and the increase in CTC and the new FTC. As with all tax law changes of this scope, this creates some winners and some losers.
Winners–families with children who meet the definition of qualifying child. A MFJ taxpayer with $110,000 of AGI under the old law would get a $1,000 CTC for a qualifying child, but still have the $4,100 personal exemption worth $902 (at current rates). Under the new law, they would get a $2,000 tax credit, an $88 benefit. The same taxpayer at $50,000 AGI got the $1,000 CTC plus the personal exemption worth $492 (at current rates) under the old law, vs. the $2,000 credit under new law, a $508 tax savings. At $300,000 AGI under old law, no CTC but a deduction worth $984 (new rates)–new law, a $2,000 CTC credit, or $1,016 in tax savings.
Losers–moderate income families with dependents who don’t qualify for the CTC whose taxable income exceeds the 12% bracket. For example, our family above with $110,000 in AGI, but with a dependent over age 17. Under old law, no FTC, but a $4,100 exemption deduction worth $902 (at new rates). Under new law, no exemption deduction, but the FTC of $500, resulting in a $402 tax increase. Eventually, the tax rate reductions make up for the loss of the personal exemption.
An example of the effect of the repeal of the personal exemption for lower-income taxpayers with high itemized deductions but without dependents is here.
Notes: In the examples on this page, only the CTC and FTC, the deduction for personal exemptions and rate changes are considered. Also, under old law, the deduction for personal exemptions was phased out for high-income taxpayers.