There is great news for parents in the middle to upper income tax brackets in 2018. The new tax law dramatically increased the income phaseout threshold for claiming the child tax credit. In 2017, parents were eligible for a $1,000 tax credit for each child under the age of 17 as long as their adjusted gross income (“AGI”) was below $75,000 for single filers and $110,000 for married couples filing a joint return. If your AGI was above those amounts, the $1,000 credit was reduced by $50 for every $1,000 of income above those thresholds. In other words, the child tax credit completely phased out for a single filer with an AGI greater than $95,000 and for a married couple with an AGI greater than $130,000.
Note: If you are not sure what the amount of your AGI is, it’s the bottom line on the first page of your tax return (Form 1040).
New Phaseout Thresholds In 2018+
Starting in 2018, the new phaseout thresholds for the Child Tax Credit begin at the following AGI levels:
Single Filer: $200,000
Married Filing Joint: $400,000
If your AGI falls below these thresholds, you are eligible for the full Child Tax Credit. For taxpayers with an AGI amount that exceeds these thresholds, the phaseout calculation is the same as 2017. The credit is reduced by $50 for every $1,000 in income over the AGI threshold.
Wait……It Gets Better
Not only will more families qualify for the child tax credit in 2018 but the amount of the credit was doubled. The new tax law increased the credit from $1,000 to $2,000 for each child under the age of 17.
In 2017, a married couple, with three children, with an AGI of $200,000, would have received nothing for the child tax credit. In 2018, that same family will receive a $6,000 tax credit. That’s huge!! Remember, “tax credits” are more valuable than “tax deductions”. Tax credits reduce your tax liability dollar for dollar whereas tax deductions just reduce the amount of your income subject to taxation.
Tax Reform Giveth & Taketh Away
While the change to the tax credit is good news for most families with children, the elimination of personal exemptions starting in 2018 is not. In 2017, taxpayers were able to take a tax deduction equal to $4,050 for each dependent (including themselves) in addition to the standard deduction. For example, a married couple with 3 children and $200,000 in income, would have been eligible received the following tax deductions:
Standard Deduction: $12,700
Child 1: $4,050
Child 2: $4,050
Child 3: $4,050
Total Deductions $32,950
Child Tax Credit: $0
This may lead you to the following question: “Does the $6,000 child tax credit that this family is now eligible to receive in 2018 make up for the loss of $20,250 ($4,050 x 5) in personal exemptions?”
By itself? No. But you have to also take into consideration that the standard deduction is doubling in 2018. For that same family, in 2018, they will have the following deductions and tax credits:
Standard Deduction: $24,000
Personal Exemptions: $0
Total Deductions: $24,000
Child Tax Credit: $6,000
Even though $24,000 plus $6,000 is not greater than $32,950, remember that credits are worth more than tax deductions. In 2017, a married couple, with $200,000 in income, put the top portion of their income subject to the 28% tax bracket. Thus, $32,950 in tax deductions equaled a $9,226 reduction in their tax bill ($32,950 x 28%).
In 2018, due to the changes in the tax brackets, instead of their top tax bracket being 28%, it’s now 24%. The $24,000 standard deduction reduces their tax bill by $5,760 ($24,000 x 24%) but now they also have a $6,000 tax credit with reduces their remaining tax bill dollar for dollar, resulting in a total tax savings of $11,760. Taxes saved over last year: $2,534. Not a bad deal.
For many families, the new tax brackets combined with the doubling of the standard deduction and the doubling of the child tax credit with higher phaseout thresholds, should offset the loss of the personal exemptions in 2018.
This information is for educational purposes only. Please consult your accountant for personal tax advice.
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.