If you're a parent, you know just how expensive having children can be. From childcare costs to activities to healthcare, adding kids to your household could send your finances on a serious downward spiral if you aren't prepared. Thankfully, a growing number of families will get some much-needed relief this year thanks to changes to the Child Tax Credit.
Tax credits versus deductions
Some people use the terms "tax credit" and "tax deduction" interchangeably, but they're not the same thing at all. A tax deduction exempts a portion of your income from taxes, and your savings are based on your effective tax rate. This means if you get a $2,000 deduction, and your effective tax rate is 25%, you reap $500 in savings.
A tax credit, on the other hand, is a dollar-for-dollar reduction of your tax liability, and your savings from it aren't dependent on your effective tax rate. This means that if you snag a $2,000 tax credit, you owe the IRS $2,000 less -- no matter how much tax you normally pay on your income. That's why tax credits are so desirable, and why so many families will have something to celebrate this year.
The Child Tax Credit
The Child Tax Credit is designed to help families with children under the age of 17. This year, the credit is worth $2,000 per child who falls into that category (whereas last year, it was only worth $1,000 per child).
That said, whether you get the credit in full depends on your income level. You'll need to have earned at least $2,500 in 2018 to qualify for the Child Tax Credit. The credit then phases out if your income exceeds $200,000 as a single tax filer, or $400,000 if you're married filing jointly.
That's an important change from the previous tax year. Back in 2017, the Child Tax Credit began to phase out at $75,000 in income for single tax filers and $110,000 for couples filing jointly. The above-mentioned increases will therefore make this credit far more accessible for the 2018 tax year.
Another important change to the Child Tax Credit is that up to $1,400 per child is now refundable. Tax credits come in two varieties: refundable and nonrefundable. With the latter, the most a credit in that category can do is reduce your tax liability to $0; it can't produce a refund for you. Refundable credits, on the other hand, will pay you if they cause your tax liability to fall below $0, so the fact that the Child Tax Credit is now partially refundable means more filers might get additional money back from the IRS when they file their 2018 returns.
Though the 2018 tax overhaul will no doubt cause a fair amount of confusion this filing season, parents can rest assured that at least one positive change has come as a result of it. So don't forget to claim the Child Tax Credit -- even if you didn't get to last year, there's a good chance you'll be eligible this time around.