Tax reform is now more than a year old, but for most taxpayers, the first sign of the impact that the new tax laws have had will show up when they prepare their 2018 tax returns over the next few months. Some of the highest-profile changes to tax laws involved cutting most of the income tax brackets that individual taxpayers used to pay, as well as boosting the size of the standard deduction.

However, for taxpayers who have children, one of the most lucrative changes in tax reform involved the popular child tax credit. This valuable tax break saved the typical family thousands of dollars on their taxes even before the favorable changes that tax reform made, and many taxpayers could see their child tax credit amount double on their 2018 returns. Moreover, with more people being able to use the child tax credit as a result of reform, the overall impact of the tax break will be that much bigger.

Five children with hula hoops on a grass field on a partly cloudy day.

Image source: Getty Images.

A simple credit

The biggest benefit of the child tax credit is that it's easy to understand. Under the old tax laws, parents got $1,000 in credits for each qualifying child. Children needed to be 16 or younger at the end of the tax year in question in order to qualify for the credit, and those who claimed the credit had to be able to treat the child as a dependent for tax purposes. The taxpayer claiming the credit had to be able to demonstrate that the child lived with the taxpayer for more than half the year and that the taxpayer provided at least half of the financial support for the child. In some cases, taking care of grandchildren, siblings, or other relatives also qualified the caretaker to claim the tax credit.

More than 22 million tax returns in 2016, which is the most recent year for which the IRS has provided data, included a claim for the child tax credit. Total credits awarded amounted to $26.8 billion, working out to an average of $1,213 per family.

The regular child tax credit is a nonrefundable credit, which means that if you don't have enough tax liability for the credit to offset, then you just lose the tax break. However, the additional child tax credit is a refundable credit that does allow taxpayers to collect the amount of the credit as a refund. To qualify for 2018, parents must have $2,500 or more in earned income from wages, salaries, or similar work-related sources, with the refundable portion of the credit equal to 15% of the excess income above the $2,500 mark. Close to 19 million of the 22 million returns claiming the regular credit also took the additional credit, claiming a total of $25.4 billion. That boosts the per-taxpayer average take to $2,361.

Why child tax credits are on the rise

There are three main reasons why child tax credit amounts are likely to get even bigger on 2018 returns compared to the 2016 IRS data:

  • The basic child tax credit doubled from $1,000 to $2,000 under tax reform, beginning in 2018.
  • The maximum refundable amount of the additional child tax credit rose from $1,000 to $1,400, with less earned income necessary to start qualifying for the credit.
  • Maximum income amounts will rise dramatically, letting more people claim the credit.

The last point is perhaps the most important. The child tax credit starts to phase out at certain income levels, and the thresholds that prevailed before tax reform were a lot lower than the new ones, as you can see below.

Filing Status

Old Law Income Threshold

New Law Income Threshold

Single, head of household, or qualifying widow(er)

$75,000

$200,000

Married filing jointly

$110,000

$400,000

Married filing separately

$55,000

$200,000

Data source: IRS.

Once your income rises above the threshold, you lose $50 of your credit for every $1,000 in extra modified adjusted gross income you make. The six-figure boosts to the threshold amounts will open up the credit to a host of taxpayers who never before qualified.

Get the credit you deserve

It's crucial to give the child tax credit a new look for 2018, because it might be the first opportunity you've ever had to take it. Moreover, with a new increase to the amount of the credit, taxpayers with children will see more benefits from the tax break than ever before.

The Motley Fool has a disclosure policy.