Child Tax Credit §24
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.
Note: A qualifying child’s Social Security number must be included on a taxpayer’s return to receive and nonrefundable 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 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 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 other items in its definition of earned income, the additional child tax credit is based only on earned income to the extent it is included in computing taxable income.
The aggregate amount of child credits that may be claimed is phased out for individuals with income over specific threshold amounts. Especially, 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.
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 qualified costs) 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.
Alimony Payment Deduction Repealed
New tax law eliminates alimony 2019
Alimony payments and separate maintenance generally have been an above-the-line deduction for the payor (§62(a)(10) & §215). However, such fees must be included in the gross income of the payee or recipient (§61(a)(8) & §71). Alimony payments must meet the various requirements §71. Child support payments 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 divorce 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
A taxpayer could claim a deduction for moving expenses incurred in connection with starting a new job, regardless of whether or not the taxpayer itemizes his deductions. To qualify, the new workplace generally had to be at least 50 miles
farther from the former residence than the former place of work or, if the taxpayer had no former workplace, at least 50 miles from the former residence
(§217). In addition, 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 period, the provider retains the deduction for moving costs. The rules are providing 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 moves pursuant to a military order and incident to a permanent change of station. In addition, the exclusion of employer-provided qualified moving expense reimbursements is suspended for tax years 2018 through 2025
State & Local Taxes (SALT) Limited
An individual may claim an itemized deduction for state and local government income and property taxes paid (§164). In lieu of the itemized deduction for
State and local income taxes, individuals may claim an itemized deduction for state and local government sales taxes. Property taxes may be allowed as a deduction in computing adjusted gross income if incurred in connection with property used in a trade or business; otherwise, they are an itemized deduction. In the case of State and local income taxes, the deduction is an itemized deduction notwithstanding that the tax may be imposed on profits from a trade or business. In determining a taxpayer’s alternative minimum taxable income, no itemized deduction for property, income, or sales tax is allowed. From 2018 to 2025, unless paid or accrued in carrying on a trade or business, or an activity described in §212 (relating to expenses for the production of income), individuals are not allowed an itemized deduction for State and local:
(2) sales taxes, or
(3) property taxes.
Note: As a result, §164 now allows only those deductions for State, local, and foreign property taxes, and sales taxes, that are presently deductible in computing income on an individual’s Schedule C, Schedule E, or Schedule F on such an individual’s tax return. Thus, for instance, in the case of property taxes,
an individual may deduct such items only if those taxes were imposed on
business assets (such as residential rental property).
A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of
(i) State and local property taxes not paid or accrued in carrying on a trade or business, or an activity described in §212, and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the taxable year.
However, foreign real property taxes may not be deducted under this exception.
Note: An individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar
limitation applicable for taxable years beginning after 2017.
Charitable Contributions Modified
A taxpayer may claim an itemized deduction for charitable contributions (§170).
To be eligible, a contribution must be made by the last day of the tax year for which a return is filed. A charitable contribution deduction is limited to a certain percentage of the individual’s adjusted gross income (AGI). The AGI limitation varies depending on the type of property contributed and the type of exempt organization receiving the property.
In general, the cash contributed to public charities, private operating foundations other than nonoperating private foundations, and certain governmental units and other organizations (“50 percent organizations”) have been deductible up
to 50% of the donor’s AGI.
Contributions that did not qualify for the 50% limitation ( e.g ., contributions
to private foundations) could be deducted up to the lesser of:
(1) 30% of AGI, or
(2) the excess of the 50%-of-AGI limitation for the tax year over the
amount of charitable contributions subject to the 30% limitation.
Contributions that exceeded the deductible limit could generally be carried four for five years.
From 2018 through 2025, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. The 5-year carryover period is retained to the extent that the contribution amount exceeds 60% of the donor’s AGI.
College Athletic Event Seating Rights Repealed
In general, a charitable deduction is disallowed to the extent a taxpayer receives a benefit in return. A special rule, however, permitted taxpayers to de-
duct as a charitable contribution 80% of the value of a contribution made to an educational institution to secure the right to purchase tickets for seating at an athletic event in a stadium at that institution. Effective 2018 and later, this special rule that provides a charitable deduction of 80% of the amount paid for the right to purchase tickets for athletic events is repealed.
Substantiation Exception for Donee Reported Contributions Repealed
No deduction is permitted for a charitable (cash or noncash) contribution of more than $250 unless the donation is substantiated with a contemporaneous written acknowledgment from the charity (§170(f)(8)(A)). However, a taxpayer is not required to obtain an acknowledgment if the charity files a return to report the information required.
Effective 2017 and later, this exception that relieves a taxpayer from providing a contemporaneous written acknowledgment from the charity for contributions of $250 or more when the charity files a return with the required information is repealed.
Mortgage Interest Deduction Limited
A taxpayer may claim an itemized deduction for mortgage interest paid with respect to a principal residence and one other residence of the taxpayer. Itemizers could have deducted interest payments on up to $1 million in acquisition indebtedness (for acquiring, constructing, or substantially improving a residence), and up to $100,000 in home equity indebtedness (§163(h)). Under the alternative minimum tax (AMT), however, the deduction for home equity indebtedness is disallowed.
For 2018 through 2025, a taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 in the case of married taxpayers filing separately).
In the case of acquisition indebtedness incurred before December 15, 2017, this limitation is still $1,000,000 ($500,000 in the case of married taxpayers filing separately).
Note: For taxable years beginning after 2026, a taxpayer may again treat up
to $1,000,000 ($500,000 in the case of married taxpayers filing separately) of
indebtedness as acquisition indebtedness, regardless of when the indebtedness was incurred.
Additionally, the deduction for interest on home equity indebtedness is suspended. Thus, for taxable years beginning after 2017, a taxpayer may not claim a deduction for interest on home equity indebtedness. The suspension ends for taxable years beginning after 2025.
Securities Rollover Into SSBICs Repealed
Gain or loss generally is recognized on any sale, exchange, or other disposition of property. A special rule permitted an individual or corporation to roll over without recognition of income any capital gain realized on the sale of publicly traded securities when the proceeds were used to purchase common stock or a partnership interest in a specialized small business investment corporation (SSBIC) within 60 days of the sale of the securities (§1044). SSBICs are a special type of investment fund licensed by the U.S. Small Business Administration until 1996 when the program was repealed (though certain existing SSBICs were grandfathered). The amount of gain that a taxpayer could rollover in a tax year was limited to the lesser of:
(1) $50,000 ($250,000 for corporations) or
(2) $500,000 ($1,000,000 for corporations) reduced by the gain previously excluded under the provision.
For 2018 in a later, the special rule permitting gains on publicly traded securities to be rolled over to an SSBIC is repealed.
Educator Expenses – §62
Ordinary and necessary business expenses are deductible (§162). However, unreimbursed employee business expenses generally are deductible only as an itemized deduction and only to the extent that the individual’s total miscellaneous deductions exceed 2% of AGI.
Note: An individual’s otherwise allowable itemized deductions may be further limited by the overall limitation on itemized deductions, which reduces itemized deductions for taxpayers with adjusted gross income in excess of a threshold amount. In addition, miscellaneous itemized deductions are not allowable under the alternative minimum tax.
However, certain expenses of eligible educators are allowed as an above-the-line deduction (§62). Specifically, educators who work at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide, can deduct up
to $250 of qualified out of pocket expenses for books and classroom supplies.
The deduction is available for those in public or private elementary or secondary schools (including kindergarten).
Qualifying expenses include books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom (§62(a)(2)(D)).
This above-the-line deduction for eligible educators was scheduled to expire for taxable years beginning after December 31, 2014. However, in 2015, the §62 deduction became permanent. In addition, the $250 maximum deduction amount
was indexed for inflation and expenses for professional development were made eligible expenses for purposes of the deduction.
For tax years beginning in 2018, the maximum amount which an eligible educator may deduct under §62 for expenses remains at $250.
Discharge Of Student Loan Indebtedness Expanded
Any debt that is forgiven constitutes income. That includes student loans, even if such loans are forgiven on account of death or disability. Under an exception to this general rule, gross income does not include any amount from the forgiveness (in whole or in part) of certain student loans, provided that the forgiveness is contingent on the student’s working for a certain period of time in certain professions for any of a broad class of employers (§108).
From 2018 through 2025, the exclusion of student loan discharges from gross income is modified, by including within the exclusion of certain discharges on account of death or disability. Loans eligible for the exclusion under the provision are loans made by:
(1) the United States (or an instrumentality or agency thereof),
(2) a State (or any political subdivision thereof),
(3) certain tax-exempt public benefit corporations that control a State, county, or municipal hospital and whose employees have been deemed to be public employees under state law,
(4) an educational organization that originally received the funds from which
the loan was made from the United States, a State, or a tax-exempt public benefit corporation, or
(5) private education loans (for this purpose, private education loan is de-
fined in §140(7) of the Consumer Protection Act).
Under the provision, the discharge of a loan as described above is excluded from
gross income if the discharge was pursuant to the death or total and permanent
disability of the student. Additionally, the provision modifies the gross income
exclusion for amounts received under the National Health Service Corps loan
Higher Education Tuition Deduction (Expired) – §222
The higher education tuition deduction under §222 expired at the end of 2016. It allowed taxpayers to deduct up to $4000 from their income for qualified tuition expenses paid for the taxpayer, their spouse, or their dependents.
Tax on Net Investment Income – §1411
Since 2013, because of the 2010 health care legislation, a tax is imposed on net investment income in the case of an individual, estate, or trust. In the case of an individual, the tax is 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over the threshold amount (§1411). The thresh-
old amount is $250,000 in the case of a joint return or surviving spouse, $125,000
in the case of a married individual filing a separate return, and $200,000 in any other case. These thresholds are not indexed for inflation.
Note: This provision is treated as a “tax” for purposes of computing the penalty for underpayment of estimated tax. As a result, individuals are required
to calculate their estimated taxes accordingly.
Comment: If Congress is successful in repealing the Affordable Care Act,
this could potentially go away, but it remains for the time being.
21Net investment income (NII) is the excess of:
(1) the sum of:
(a) gross income from interest, dividends, annuities, royalties, and rents,
other than such income which is derived in the ordinary course of a trade
or business that is not a passive activity with respect to the taxpayer or a
trade or business of trading in financial instruments or commodities, and
(b) net gain (to the extent taken into account in computing taxable in-
come) attributable to the disposition of property other than property held
in the active conduct of a trade or business that is not in the trade or
the business of trading in financial instruments or commodities, over
(2) deductions properly allocable to such gross income or net gain.
Note: For purposes of this tax, modified adjusted gross income is AGI in-
creased by the amount excluded from income as foreign earned income un-
der §911(a)(1) (net of the deductions and exclusions disallowed with respect
to the foreign earned income).
Exclusions from investment income include tax-exempt bonds interest, gains
from the sale of a personal residence ($250,000 or $500,000 for married filing
joint) under the §121 exclusion and distributions from qualified plans, IRAs, and
In the case of an estate or trust, the tax is 3.8% of the lesser of undistributed net
investment income or the excess of adjusted gross income (as defined in §67(e) )
over the dollar amount at which the highest income tax bracket applicable to an
estate or trust begins.
Reduced Home Sale Exclusion For Nonqualified Use – §121
Since 2009, gain from the sale or exchange of a principal residence allocated to
periods of nonqualified use is not excluded from gross income. The provision is
designed to prevent §121 usage on appreciation attributable to periods after
2008 where a residence was a rental property or a vacation home before being a
The amount of gain allocated to periods of nonqualified use is the amount of gain multiplied by a fraction the numerator of which is the aggregate periods of nonqualified use, during the period the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Nonqualified use does not include any use prior to 2009.
Note: The provision does not require a market appraisal of the property on
January 1, 2009, nor when used is converted to a principal residence but, rather determine the excluded appreciation on a pro-rata basis over time.
A period of nonqualified use means any period (not including any period be-
fore January 1, 2009) during which the property is not used by the taxpayer or
the taxpayer’s spouse or former spouse as a principal residence. For purposes
of determining periods of nonqualified use, the following are not taken into
(1) any period after the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period),
(2) any period (not to exceed two years) that the taxpayer is temporarily
absent by reason of a change in place of employment, health, or, to the
extent provided in regulations, unforeseen circumstances.
Post-May 6, 1997 Depreciation
If any gain is attributable to post-May 6, 1997, depreciation, the exclusion
does not apply to that amount of gain, as under present law, and that gain is
not taken into account in determining the amount of gain allocated to nonqualified use.
Surviving Spouse Home Sale Exclusion – §121
For sales after 2007, the maximum exclusion on the sale of the main home by the unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse’s death. However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of such death, and during the 2-year period ending on the date of such death, there was no sale or exchange of the main home by either spouse which qualified for the exclusion.
Insubstantial Benefit Charitable Contribution Limitation – §513
De minimis benefits from a charity to a donor do not reduce the donor’s charitable contribution deduction in 2018 if:
(1) the donor made a minimum payment of $54 (up from $53.50 in 2017)
and received benefits costing not more than $10.80 (up from $10.70 for
(2) the charity distributed free unordered ‘‘low-cost articles’’ costing
not more than $10.80 (up from $10.70 for 2017).
Note: A charitable contribution is also fully deductible if the benefit received
is not more than the lesser of $108 (in 2018) or 2% of the amount of the
Household Employees – §3121
Employers must withhold and pay FICA taxes on the wages of household workers if cash wages paid during the calendar year reach a certain threshold
Note: Employers must also pay FUTA taxes for household employees if they
have paid aggregate cash wages of $1,000 or more in a calendar quarter
For 2018, the social security and Medicare wage threshold for household employees is $2,100 (up from $2,000 in 2017). This means that if a taxpayer pays a
household employee cash wages of less than $2,100 in 2018, the taxpayer does
not have to report and pay social security and Medicare taxes on that employee’s
2018 wages. Employment taxes for household employees are reported and paid
on Schedule H of Form 1040 or Form 1040A.
Adoption Credit – §23 & §137
Taxpayers that adopt children can receive a refundable tax credit for qualified adoption expenses (§23). A taxpayer may also exclude from income adoption expenses paid by an employer (§137).
For 2018, the maximum adoption credit is $13,810 (up from $13,570 in 2017).
Also, the maximum exclusion from income for benefits under your employer’s adoption assistance program is $13,810. These amounts are phased out if your
modified AGI is between $207,140 and $247,140 in 2018 ($203,540 and $243,540
in 2017). You cannot claim the credit or exclusion if your modified AGI is
$247,140 or more in 2018 ($243,540 or more in 2017) (R.P. 2018-18).
Education Savings Accounts – §530 & §529
Coverdell Accounts (§530): Coverdell Education Savings Accounts are tax-
exempt savings accounts used to pay the higher education expenses of a designated beneficiary (§530). Income earned by Coverdell education savings accounts, which are established for the purpose of paying qualified education expenses of a named beneficiary, is exempt from tax. Contributions are not deductible and may not exceed $2,000 per beneficiary annually, and may not be made after the designated beneficiary reaches age 18 (except in the case of a special needs beneficiary).
Note: EGTRRA increased the annual contribution amount from $500 to
$2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. ATRA permanently extended these
changes to Coverdell accounts for taxable years beginning after December
The contribution limit is phased out for contributors with modified adjusted
gross income between $95,000 and $110,000 ($190,000 and $220,000 for married
24taxpayers filing a joint return). Distributions from a Coverdell account are excludable from the gross income of the beneficiary if used to pay for qualified education expenses. Qualified education expenses include qualified higher education expenses and qualified elementary and secondary school expenses for attendance in kindergarten through grade 12.
Qualified Tuition Program (§529): A qualified tuition program is a program established and maintained by a State or agency or instrumentality thereof, under which a person may make cash contributions to an account that is established for the purpose of satisfying the qualified higher education expenses of the designated beneficiary of the account provided it satisfies certain specified requirements.
Contributions are not tax-deductible but, are treated as a completed gift eligible for the gift tax annual exclusion. Amounts in the account accumulate on a tax-
free basis and qualified distributions are exempt from tax. 2018 Changes: The TCJA modifies §529 plans to allow such plans to distribute not more than $10,000 in expenses for tuition incurred during the taxable year connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis.
Note: Thus, under the provision, although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maxi-
mum of $10,000 in distributions free of tax, regardless of whether the funds
are distributed from multiple accounts.
Any excess distributions received by the individual would be treated as a distribution subject to tax under the general rules of §529.
The provision also modifies the definition of higher education expenses to include certain expenses incurred in connection with a homeschool. Those expenses are:
(1) curriculum and curricular materials;
(2) books or other instructional materials;
(3) online educational materials;
(4) tuition for tutoring or educational classes outside of the home (but only if
the tutor or instructor is not related to the student);
(5) dual enrollment in an institution of higher education; and
(6) educational therapies for students with disabilities.
Rollovers Between §529 Tuition & ABLE Programs
A qualified ABLE program is a tax-favored savings program established and
maintained by a State or agency or instrumentality thereof intended to benefit
individuals with qualified disability expenses (§529A) Contributions to an ABLE
account must be made in cash and are not deductible. However, a qualified
25ABLE program is generally exempt from income tax but is otherwise subject to
the taxes imposed on the unrelated business income of tax-exempt organizations.
The account may not receive aggregate contributions during any taxable year in excess of the annual gift tax exclusion. Distributions for qualified disability expenses are excludable from income.
For 2018 and thereafter, the TCJA allows amounts from §529 qualified tuition programs to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that §529 account or a member of such designated beneficiary’s family. However, such rolled-over
amounts count towards the overall limitation on amounts that can be contributed to an ABLE account within a taxable year. Any amount rolled over that is in excess of this limitation shall be includible in the gross income of the distributee in a manner provided by §72.
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