Jason LeRoy of Doeren Mayhew
By Jason W. LeRoy, ASA, CVA, CFE Shareholder, Valuation and Litigation Support Group

With the passing of the Tax Cuts and Jobs Act (TCJA), comes some additional tax relief for families with children and dependents. Increases in credit amounts and phase-out thresholds, along with other dependent bonus credits, will bring these taxpayers opportunities to temporarily lower their tax liability from 2018 to 2025.

Child Tax Credit: Post-TCJA

The Child Tax Credit underwent a few changes through the tax reform process positively impacting families with children, including:

Increased Credit Amount: The credit has been increased from $1,000 to $2,000 for each qualifying child, which is defined by the Internal Revenue Service (IRS) as a child who:

  • Is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister or a descendant of any of them (for example, your grandchild, niece or nephew)
  • Is under the age of 16
  • Did not provide over half of their own support
  • Lived with you for more than half of the year
  • Is claimed as a dependent on your return
  • Does not file a joint return for the year
  • Was a U.S. citizen, and U.S. national or a resident of the Unites States

Additional Family Member Credit: An additional non-refundable credit will be allowed for qualifying non-child dependents of the taxpayer in the amount of $500, which was previously not available.

 Increased Phase-Out Thresholds:  Eligibility for the credit is phased-out if the taxpayer’s modified adjusted gross income is above a certain threshold. New law increases these as outlined below:

  • Married filing jointly – from $110,000 to $400,000
  • Married filing separately – from $55,000 to $200,000
  • Single, head of household or qualifying widow(er) – from $75,000 to $200,000

Refundable Amount: A refundable tax credit can be given even if a taxpayer ends up with no tax liability at all. For example, if the calculated tax for the year is $1,000 and there are $1,500 in refundable tax credits, the tax bill can be reduced to $0 and the taxpayer will get back the extra $500. Under the TCJA, up to $1,400 of the Child Tax Credit is refundable.

Tips for Individuals and Family Law Practitioners

The new laws under the TCJA as they relate to the Child Tax Credit should be carefully reviewed on a case-by-case basis. The following are a few tips and considerations for individuals and family law practitioners as it relates to the credit:

1. The credit should be addressed in any divorce agreement where children under 16 years old and younger are involved.

2. As of the date this article was written, the IRS has not yet issued guidance clarifying whether or not this credit can be transferred back and forth between parents ever year, but it will likely follow the same procedures as dependency exemptions.

3. Income levels of the parties need to be considered in each case to determine eligibility of the credit due to phase-out thresholds.

4. The increase in the credit is viewed as an offset to the elimination of personal exemptions. Any divorce judgments entered into before the TCJA became law may need to be reviewed to determine if revisions are needed to account for the changes in this credit and personal exemptions. It may be beneficial to make any necessary revisions prior to the changes in the deductibility of alimony payments going into effect after Dec. 31, 2018.

5. The changes to this credit should be considered along with other changes from the TCJA that could affect after-tax income, such as, changes to the dependency exemptions, individual income tax rates, mortgage interest deductions, alimony, standard deductions, etc.

Need assistance in navigating the ins and outs of the Child Tax Credit for your clients? Rely on the assistance of Doeren Mayhew’s tax advisors and litigation support advisors. Contact them today!

 


About the Author
Jason LeRoy specializes in preparing business valuations for litigation and non-litigation purposes, and providing expert witness testimony and marital dissolution consulting services, as well as fraud and forensic accounting services. He can be contacted directly at leroy@doeren.com or 248.244.3177.