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Expanded Child Tax Credit: A Tax Reform Provision That Could Benefit the Affluent

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Expanded Child Tax Credit
A Tax Reform Provision That Could Benefit the Affluent

It has been about nine months since the Tax Cuts and Jobs Act (TCJA) was signed into law, but many individuals and families are still sifting through all the details of the legislation to determine ways that they might benefit.

There’s at least one provision of tax reform that could benefit affluent individuals and families especially. The TCJA doubled the child tax credit from $1,000 to $2,000 while also significantly raising the income limit for receiving the full credit. This limit has been increased from $110,000 to $400,000 for married couples who file a joint tax return, and from $75,000 to $200,000 for single filers, heads of household and married couples filing separately.

Crunching the Numbers

As a result, many affluent families who couldn’t take advantage of this valuable tax benefit before will now qualify for it. If your adjusted gross income (AGI) falls below the income threshold, you will receive a tax credit of $2,000 for each of your children who is under 17 years of age at the end of the tax year.

The credit begins phasing out according to the following schedule once your AGI exceeds the income thresholds:

Filing status  Max AGI for full credit Max AGI for partial credit
Single, head of household
and married filing separately
$200,000 $240,000
Married filing jointly $400,000 $440,000

If your AGI falls within these ranges, your child tax credit will be reduced by $50 for each $1,000 that your AGI exceeds the lower threshold. So if you’re single and your AGI is $220,000, your tax credit would be $1,000 for each qualifying child. Your tax credit would vanish once your AGI exceeded $240,000.

In addition, the TCJA also includes a $500 family credit that can be applied to other family members, such as an aging parent you care for or a child who’s 17 years of age or over who you support. Note that both the increased child tax credit and the family tax credit expire at the end of 2025.

Personal Exemption Repealed

It’s important to note that while tax reform doubled the child tax credit, it also repealed the personal exemption. So tax reform giveth, and tax reform taketh away.

But the net result will still be positive for many individuals and families. One reason why is because the child tax credit reduces your tax bill on a dollar-for-dollar basis. Conversely, the personal exemption was just a deduction that reduced your taxable income. Tax credits are always more valuable than tax deductions.

The following example illustrates how the doubled child tax credit could benefit an affluent family:

James and Janet have three children under the age of 17: Jimmy, Johnny and Jamie. Last year, they had AGI of $210,000 and were in the 28% tax bracket. So they didn’t qualify for the $1,000 child tax credit, but they were able to claim $12,150 in personal exemptions for their three kids. This saved them $3,400 in taxes.

This year, James and Janet will qualify for the full $2,000 child tax credit for all three of their kids, which will yield a $6,000 tax savings. The result is additional tax savings of $2,600 ($6,000 – $2,400 = $6,000) this year.

Devil’s in the Details

As with most tax matters, the devil can be in the details. So it’s important to speak with your tax advisor about your specific situation and how these changes could affect your tax situation.

Please contact us if you have more questions about the child tax credit or any other aspects of the tax reform act.

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