Beginning with Tax Year 2018 (for filing in April 2019), the new tax laws have changed the ways in which we can use our children and other dependents to save money on our taxes. With the passing of the Tax Cut and Jobs Act (TCJA) in December 2017, many taxpayers are left wondering what is going to happen to the Child Tax Credit (CTC)? Will it be eliminated? Expanded upon?
The first thing to know is that although we’re hoping to offer some general advice here, we are not accountants and therefore we can’t and aren’t trying to give you any specific tax or financial advice. But what we can do is make you aware of some of the issues that might come up if you’re involved in a divorce or custody issue and point out what we think you need to discuss with your accountant. Read on to find out exactly how the CTC is changing and what it could mean for you when you file your 2018 taxes.
CTC + TCJA = $$?
No, that’s not some weird new way of doing math. That’s a legitimate equation. Under the new tax laws, we no longer claim “dependency deductions” for our dependents. Instead, we might qualify for a tax credit to directly reduce the amount of taxes owed. This credit is now available to higher-income families and it’s worth more! Prior to 2018, the CTC was not available to single taxpayers who made more than $75k or married, filing jointly taxpayers who made more than $110k. Beginning in 2018, the new CTC will be worth $2,000 per qualifying child. And the adjusted gross income (AGI) cap for taxpayers has also gone up: it’s now $200k for single taxpayers and $400k for married/filing jointly taxpayers.
Which of my kids is a “qualifying child”?
While we all know how wonderful and special each one of our children is, we must recognize that when it comes to Uncle Sam and the IRS, some of them just won’t make the cut. To be clear, a “qualifying child” is one that checks all these boxes:
- The son/daughter/step child/foster child/brother/sister/stepbrother/stepsister/half-brother/half-sister/or a descendant of any one of them (i.e. your grandchild or niece/nephew);
- Is under the age of 17;
- Did not provide over half their own support;
- Lived with you for more than half the year (183 nights, to be exact. 183.5 if it’s a leap year);
- Is claimed as a dependent on your return;
- Does not file a joint return for the year
- Was a U.S. citizen or U.S. national or resident of the United States
Before you call or email us asking: no, your fur babies do not count as qualifying children. (Sorry, Mrs. Whiskerson). But our aging or disabled parents or relatives might!
Dependent Care Tax Credit
There is another important tax credit to keep in mind if you have daycare expenses or if you are paying for care for aging parents or disabled relatives: the Child and Dependent Care Tax Credit (CDCTC). The CTC and CDCTC are two different things. Only parents or guardians of minor children can claim the CDCTC and only if they claim the CTC, and there are limitations to how much you can claim. The CDCTC can also be used by those who are caring for aging parents or disabled relatives. There’s no income phase out, but it can only equal up to 35% of your qualifying care expenses depending on your AGI and you can only claim certain qualifying expenses. Be sure to talk with your accountant about this before you incur those expenses you think you’ll be able to claim later!
CTC, TCJA and Family Law
It’s all coming together now! Just like with the changes to alimony brought on by the TCJA, Family Law attorneys and those going through a divorce/separation can expect some new hurdles as they navigate that already murky process.
For any divorce or separation where children under the age of 16 are involved, the CTC should be addressed in any and all agreements made by both parties. Due to the phase-out thresholds ($200k for single and $400k for married) the income of both spouses needs to be taken into consideration if still married but filing separately. In order to get the full benefit of the new CTC, it may be appropriate for one parent to claim the dependent(s) on their taxes if they make significantly less than the other parent. And remember, you can only claim the CTC if you can claim the child as a dependent. For a non-custodial parent to receive this benefit, the custodial parent must agree and assign that right (via Tax Form 8332) to the non-custodial parent in the years s/he will be permitted to claim a dependent child in their tax filing.
There are many other factors to take into consideration; if it all becomes too overwhelming, you can always give us a call! While we cannot offer you tax or financial advice, we can offer you support and guidance if you are going through a divorce. If these new changes brought on by the TCJA have your head spinning and wondering what your next move should be, give us a call so we can help you figure it all out. You can reach us at (410) 535-6100 or send us an email any time of the day to firstname.lastname@example.org