The recently enacted Tax Cuts and Jobs Act (TJCA) has brought numerous changes to the computation of income taxes for 2018 and beyond. One of the most significant changes involves the tax treatment of dependents on an individual income tax return.
Understanding how these changes impact your individual income taxes will help you plan for the upcoming tax filing season and hopefully prevent any unwanted surprises.
The personal exemption of $4,150 has been eliminated entirely.
No longer will a taxpayer receive a deduction from their adjusted gross income in computing their taxable income of this amount. Although the TJCA eliminates the dependency exemption itself, the definition of a dependent itself remains for some computations such as the child tax credit.
Although the dependency exemption has been eliminated, the child tax credit has been significantly expanded to help offset the tax impact.
The child tax credit was initiated in 1998 as a relatively small nonrefundable credit of $400 for each qualifying child under the age of 17. In the past 20 years, this child tax credit has gone through a number of changes. Prior to 2018, the child tax credit was $1,000 per qualifying child and was refundable for taxpayers with earned income of at least $3,000.
However, this child tax credit was phased out for taxpayers with an adjusted gross income over $75,000 individually and $110,000 for jointly filed returns.
Under the new TJCA rules, the child tax credit has been modified and expanded significantly. The child tax credit is now worth up to $2,000 per qualifying child. The child must be under 17 at the end of the calendar year to claim the credit. In addition, the refundable portion of the credit is now up to $1,400 and will be adjusted for inflation going forward. The earned income threshold for this refundable portion of the credit has been reduced to $1,500.
One of the most significant changes is that the credit phaseout for the child tax credit has been substantially increased to $200,000 for single filed returns and $400,000 for jointly filed returns. These income phaseout limits also apply to the new family credit for other dependents that are over 17 years of age. Previously once a child was over 17 there was no tax credit available. However, there is a new nonrefundable family credit for $500 for other dependents. Other dependents might include aging parents, or children over the age of 17 that you continue to support.
Two other credits that are available for taxpayers as a result of dependents are the child and dependent care tax credit and several education credits. These two credits remain essentially unchanged from prior years but are important to be aware of nevertheless.
The child and dependent care credit allows a taxpayer to claim up to $3,000 in expenses for a single child and up to $6,000 for two or more in expenses related to child and dependent care. The credit is equal to 20 to 35 percent of these expenses as a credit. There is no phaseout limit on this child and dependent care credit.
There are two education credits available, and they may be claimed for your dependents. The Lifetime Learning Credit covers up to $2,000 per year as long as the modified adjusted gross income is $65,000 or less for single filers and $130,000 or less for married filing jointly. The American Opportunity Tax Credit allows a taxpayer to claim up to $2,500 per eligible student per year for up to four years as long as their modified adjusted gross income is under $90,000 for single filers or $180,000 for married filing jointly. Up to 40 percent of the American Opportunities Tax Credit is refundable. A taxpayer can only claim one of the education credits for each student.
A tax credit is a very significant reduction on a dollar for dollar basis of the amount of income taxes a taxpayer pays. Being aware of these credits and how they impact the taxes and how they have changed will help greatly in planning for the upcoming tax season.
