Things get complicated when you have kids. Those complications are, well, even more complicated when it comes to tax filing.
The Tax Cuts and Jobs Act (TCJA) made a variety of changes, in effect at least for tax years 2018 through 2025, that will affect millions of parents.
Here's a quick look at key tax changes for dependents.
Exemptions are eliminated: Under prior law, personal and dependent exemptions were excellent. These tax breaks helped filers reduce income, allowing them to arrive at a smaller taxable amount.
Even better, the specific dollar amount exemptions (adjusted annually for inflation) for both filers (and spouses, if married filing jointly) and qualifying dependents, were available regardless of which deduction method, either standard or itemized, used.
Now exemptions are gone. If you use the standard deduction amount, that loss will be largely offset by the substantially increased standard deduction amounts. However, if you still itemize, then no more added tax break for you, your husband or wife or your kids or other tax dependents.
Child tax credit changes: The child tax credit is still in the Internal Revenue Code and actually is doubled. The now $2,000 credit for qualifying children younger than 17 also now has a refundable component. That means that you can get up to $1,400 of the child tax credit back as a refund even if you don't owe any the U.S. Treasury any tax.
The tax credit always has phased out for wealthier families. That's still true, but the TCJA more than doubles the adjusted gross income (AGI) thresholds that apply when determining how much the credit is reduced.
Starting this tax year, the credit starts phasing out when filers' AGI hits $400,000 if sending a joint return (as opposed to the previous $110,000 married filing jointly cap) and $200,000 for all other taxpayers (up from $75,000 for unmarried taxpayers and $55,000 for marrieds filing separate returns). The thresholds are not indexed for inflation.
Just like with the prior tax law, the child tax credit is reduced by $50 for every $1,000 that a taxpayer's AGI exceeds the applicable threshold.
Note, too, that the new tax law demands stricter documentation in order to claim the child tax credit. Now taxpayers must provide each child's Social Security number. Other types of taxpayer identification that were previously accepted, such as an Individual Taxpayer Identification Number (ITIN) or Adoption Taxpayer Identification Number (ATIN), no longer suffice.
New credit for other dependents: If your children are too old to qualify for the child tax credit or you take care of someone else, such as your elderly mom, then you need to look into claiming the new $500 tax credit for those family members.
This smaller tax credit applies to dependents who are older children, for example a youngster as old as 23 who's off at college, who otherwise qualify for the $2,000 child credit. But it's not limited to just kids.
It also applies to myriad qualifying non-child relatives, including grandchildren, siblings, stepbrothers and stepsisters, parents and stepparents, grandparents, nieces and nephews, aunts and uncles, various in-laws and more.
Note, however, that this new $500 tax credit is nonrefundable. That means that if you owe $400 in taxes, the $500 credit will wipe out that Internal Revenue Service bill, but you won't get the extra $100 as a refund.
Review, adjust your withholding: The TCJA's changes to family-related tax breaks mean that taxpayers who claim dependents should do a paycheck check-up and, urges the IRS, do it soon.
If you need to make any changes to the amount of income taxes taken out each pay period, those will be less dramatic when you spread them over more paychecks left in 2018. All you have to do is submit your changes to your payroll office via a new Form W-4.
Checking and adjusting withholding now, notes the IRS, can prevent an unexpected tax bill and even penalties next year when you file your new Form 1040.
Using the IRS' withholding calculator is the easiest way to see if your payroll withholding should be adjusted.
The online tool has been updated to reflect the new tax laws.
For security conscious taxpayers — and we all should be those! — not to worry.
The withholding calculator does not ask you for personally-identifiable information, such as you name, Social Security number, address or bank account number. And the IRS says that any info entered into the online tool is not saved or recorded.
So if you have kids or other family members who could affect your 2018 tax amount, check your withholding now to make sure you're getting the most from the new tax law rather than the IRS getting the most money from you.
You also might find these items of interest:
- Day camp costs could qualify for child care tax credit
- New tax law keeps marriage penalty, but it now tends to affect mostly top-earning couples
- Adoption tax credit and other family-related 2018 inflation amounts changed by new tax law