Have you been considering having children? When we think of a new baby, often huge expenses come to mind, such as $10,000/year for daycare, $4,000 in hospital bills, $900/year for diapers, $3,000 for a 529 college savings plan (see blog post from September 24th, 2018), the cost of adding another person to health insurance…you get the point. Under the Tax Cuts and Jobs Acts of 2017 (TCJA), having a child actually helps us save money on our taxes! It’s obviously not going to be enough to make up for all the additional costs babies bring, but any little bit helps, right?

Here are all the ways the child tax credit has changed under the TCJA of 2017:

- The child tax credit increased from $1,000 to $2,000. Before the TCJA was passed, we could claim personal exemptions (for 2017 it was $4,050 per person) as well as a $1,000 tax credit per child. The personal exemptions have been temporarily suspended through the year 2025, and we no longer get to deduct them, but we do get an extra $1,000 credit for each qualified child under the age of 17. A credit is more beneficial than an exemption because a credit directly reduces our tax bill. An exemption is a deduction that reduces the amount of income that is subject to tax.

- The child tax credit is up to $1,400 refundable. In other words, even if no tax is owed, you may still be able to get a refund. The refundable portion is calculated by taking 15% of earned income above $2,500. This results in taxpayers being eligible for the full $1,400 refund once they earn $11,830.

- The earned income threshold decreased for the refundable portion discussed above. With the TCJA, a family must have earned income of $2,500 to qualify.

- Income phase-out limits increased significantly allowing more taxpayers to get the credit. For single taxpayers, the limits increased from $75,000 under the old law to $200,000, and for joint filers, they increased from $110,000 to a whopping $400,000.

- The TJCA also added a new $500 credit for any other dependent claimed by the taxpayer who is not a qualifying child under the age of 17. This credit is not refundable.

So, as you can see, having a child has raised the tax savings stakes. After reading this, you may have decided to have another child just to save on taxes! While that might not be our first tax planning suggestion to reduce your overall tax bill, we will not advise against it.

Child Tax Credit

Matt Deutsch