The 2018 Child Tax Credit Changes: What You Need to Know

The recently passed GOP tax reform bill makes several major changes to individual tax laws in the United States. Some of the biggest changes were made to the Child Tax Credit, which affects most parents and guardians of children under 17 in the United States.

If you have children, here's what you need to know about the changes made to the Child Tax Credit for the 2018 tax year and how they could affect you.

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The Child Tax Credit is being doubled for 2018

The Child Tax Credit is available to be claimed for qualified children under age 17. And you can claim it for all of your qualifying children in a given tax year. To be clear, the child must be under 17 at the end of the year to claim the credit.

For 2018, the recently passed GOP tax reform bill doubles the amount of the Child Tax Credit from $1,000 to $2,000 per qualifying child. In other words, if you have one child, you'll be able to claim a $2,000 credit. For two children, your credit is $4,000. Three children... well, you get the idea.

It's also important to emphasize that this is a credit, not a tax deduction. While a deduction reduces the amount of your income that is subject to tax, a credit reduces your tax bill dollar-for-dollar. If you owe the IRS $5,000 for the year, and have a $2,000 tax credit, your tax bill drops to $3,000.

More of the credit is refundable

Another important distinction when it comes to tax credits is refundable versus nonrefundable credits. A nonrefundable credit can be used to reduce a taxpayer's bill all the way down to zero. On the other hand, a refundable tax credit can be given even if a taxpayer ends up with no tax liability at all. If your calculated tax for the year is $1,000, and you have $1,500 in refundable tax credits to claim, you can reduce your tax bill to zero and get back that extra $500.

In a nutshell, refundable tax credits are better, especially for lower-income Americans.

So, in addition to the doubling of the Child Tax Credit amount, the tax reform bill also makes up to $1,400 of the credit amount refundable, while in previous years the Child Tax Credit was a nonrefundable credit (however, there was formerly an Additional Child Tax credit that effectively made the old Child Tax Credit refundable). In other words, even if a taxpayer has no tax liability whatsoever, he or she can get back $1,400 for each qualifying child starting with the 2018 tax year -- and this amount will be indexed for inflation in future years.

However, the refundable portion of the credit is capped at 15% of your earned income in excess of $4,500. This effectively means that if your earned income is greater than $13,833, your refundable credit amount is only capped by the $1,400 limit, and if it is less, the refundable portion of the credit can be reduced.

Income thresholds are rising dramatically

The third big change to the Child Tax Credit for 2018 involves the income qualifications. In previous tax years, the credit has only been available for low- to middle-income households. For instance, the credit began to disappear in 2017 for married couples who earned more than $110,000 and for single filers with AGI above $75,000.

In 2018, the credit will be available to far more households, thanks to a massive raise in the phaseout thresholds. Here's a quick guide to the Child Tax Credit phaseout thresholds for 2018.

Data source: GOP tax reform bill.

If your income falls between the two income thresholds for your filing status, you can still claim a partial credit. Each Child Tax Credit you qualify for will be reduced by $50 for every $1,000 your modified adjusted gross income (MAGI) exceeds the lower threshold.

A smaller credit for other dependents

The tax reform bill also includes a nonrefundable $500 "family credit" for other dependents. Examples might include an aging parent who depends on you for care or a child whose support you provide, but is 17 years old or older.

It's better, but you're losing a key tax benefit at the same time

As a final point, it's important to realize that while the Child Tax Credit is indeed going up, taxpayers are losing the personal exemption that until now has been available for every taxpayer and each of their dependents.

For 2018, before the new tax bill was passed, the personal exemption was set to rise to $4,150 per person. So, a married couple with two children would have been entitled to four of these.

The loss of the taxpayers' personal exemptions is more than offset by the big increase in the 2018 standard deduction. In the case of dependents, the new higher child tax credit helps make up the difference.

To be clear, the $1,000 in additional credit for each child will be more than the benefit from the personal exemption they would have been entitled to for many taxpayers, especially for middle-income households in the lower tax brackets and people whose incomes were formerly too high to use the credit at all. However, it's not truly "doubled" when you factor in the personal exemption loss.