Taxpayers who claim dependents on their tax returns will be seeing some changes for the 2018 filing season. The passing of the Tax Cuts & Jobs Act (TCJA) included the removal of the personal exemption deduction as well as the doubling of the child tax credit.
The personal exemption deduction has been included in the tax code since the implementation of the Revenue Act of 1913. The deduction itself has varied over the years, beginning at $3,000 for individuals and $4,000 for married couples, into the most recent 2017 amount of $4,050 per person on the tax return, including parents, children and other qualifying individuals. For example, a married couple with two children would enjoy an exemption deduction of $4,050 per person for a total of $16,200.
This personal exemption deduction has been removed with the new tax bill, which is a big change for many filers. However, while the exemption deduction has been removed, the child tax credit has been doubled.
The child tax credit provides a tax credit per child under the age of 17 to taxpayers. If the credit exceeds a taxpayer’s liability, they may receive a portion of the credit as a refund. Eligibility for the credit depends on seven requirements, including the age of the child and the income level of the household.
Prior to the TCJA, the child tax credit was a credit which offset tax liability. A separate credit, the Additional Child Tax Credit, allowed for a portion of the child tax credit to be refundable if it exceeded tax liability. However, under the TCJA there is not an Additional Child Tax Credit separate from the child tax credit; rather, there is one credit that is refundable, subject to certain requirements.
The TCJA doubled the maximum child tax credit from $1,000 to $2,000 and makes up to $1,400 of the credit refundable. The only portion of the child tax credit that is indexed to inflation is the refund ability limit. Under current law, if the tax credit exceeds tax liability, taxpayers generally use an earned income formula to determine refund ability: 15 percent of income above $2,500, up to the full refund ability amount. For example, a family with $5,000 in earned income would be eligible for a refund of $375.
The exemption deduction and child tax credit changes are just a few of the many updates with this tax reform. To learn more about how the new tax bill will affect your filing this season, call our office today to have a free conversation with one of our tax professionals.