Child Tax Credit §24
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Under §24, an individual may claim a tax credit for each qualifying child under the age of 17. A child who is not a citizen, national, or resident of the United States cannot be a qualifying child. The amount of the credit per child is $2,000 (for 2018-25) and is usable against the regular income tax and AMT.
The Child Tax Credit: 2017 vs. 2018
Note: A qualifying child’s Social Security number must be included on a taxpayer’s return to receive and non-refundable a refundable portion of the credit.
Also, the child credit is refundable to the extent of the greater of:
(1) 15% of earned income above $2,500 or
Note: The threshold was only to apply for taxable years 2009 through 2017.
However, the 2015 PATH Act made the earned income threshold permanent.
(2) for taxpayers with three or more qualifying children, the excess of the taxpayer’s social security taxes for the tax year over his or her earned an income tax credit for the year (§24(d)).
The refundable portion of the credit is limited to $1,400 per qualifying child but is indexed for inflation.
A $500 nonrefundable credit is provided for each dependent who is not a qualifying child. Such a dependent is defined as a qualifying relative under §152(b).
This dependent must also be a U.S. citizen, national, or resident of the United States and not a resident of a contiguous country (i.e., Mexico and Canada).
Earned Income
Earned income is defined as the sum of wages, salaries, tips, and other taxable employee compensation plus net self-employment earnings. Unlike the earned income tax credit, which also includes the preceding items in its definition of gained income, the additional child tax credit is based only on earned income to the extent it is included in computing taxable income.
AGI Phaseout
The accumulated amount of child credits that may be claimed is phased out for individuals with income over certain threshold amounts. Specifically, in 2018, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $200,000 for single individuals or heads of households, $400,000 for married individuals filing
joint returns, and $200,000 for married individuals filing separate returns (§24(h)). These thresholds are not adjusted for inflation. 15 Child & Dependent Care Expenses Tax Credit §21
The dependent care credit allows a taxpayer a credit for 35% (“the applicable percentage”) of eligible child care expenses ($3,000 for one child and $6,000 for two or more children) for children under 13 and disabled dependents (§21).
Thus, for 2018, the maximum dependent care tax credit is $1,050 (35% of up to $3,000 of eligible expenses) if there is one qualifying individual, and $2,100 (35% of up to $6,000 of eligible expenses) if there are two or more qualifying individuals.
However, the 35% credit rate is reduced, but not below 20%, by one percentage point for each $2,000 (or fraction thereof) of adjusted gross income (“AGI”) above $15,000. Therefore, the credit percentage is reduced to 20% for taxpayers with AGI over $43,000.
Note: The child and dependent care credit (§21) should not be confused with the child tax credit of $2,000 for each qualifying child under the age of 17 at the end of the calendar year (§24). The child tax credit is refundable for some taxpayers, but it is phased out for high-income taxpayers.3
Alimony Payment Deduction Repealed
Alimony payments and separate maintenance generally have been an above-the-line deduction for the payor (§62(a)(10) & §215). However, such amounts must be included in the gross income of the payee or recipient (§61(a)(8) & §71). Alimony payments must meet the numerous requirements §71. Child support cost are not treated as alimony
For 2019 and later, the deduction of alimony and separate maintenance payments by a payor, the inclusion of the payments in income by a payee, and the special rules for alimony trusts are repealed. Thus, alimony payments are not deductible by the payor or includible in the income of the payee.
Note: The change is effective for any divorce or separation instrument executed after 2018, or for any marriage that was divorced or separation instrument executed before 2019, and modified after that date if the modification expressly provides that the amendments made by the TCJA apply to such modification.
Moving Expense Deduction & Reimbursement Repealed
Tax Reform Update: Moving Expense Deduction Proposed for Repeal
A taxpayer could claim a deduction for moving expenses that he has to spend in connection with starting a new work, regardless of whether or not the taxpayer itemizes his deductions. To qualify, the new workplace generally had to be at least fifty miles farther from the former home than the former working place or, if the taxpayer had no former workplace, at least fifty miles from the old house (§217). Also, employer-provided qualified moving expense reimbursements are excluded from an employee’s gross income. From 2018 through 2025, the deduction for moving expenses for taxable years is suspended. However, during that suspension, the provision retains the deduction, for moving your home stuff expenses, and the rules proving timing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowances for these expenses) of members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station. Also, the exclusion of employer-provided qualified moving expense reimbursements is suspended for tax years 2018 through 2025