Child Tax Credit: The Good & The Bad
Tax Law Change
With the new tax brackets for tax year 2018, most individuals and families will find they owe less tax overall come next April. Some may have seen a slight increase in their paychecks starting last February, which means the bottom line of their tax return will not look much different than last year.
The new Child Tax Credit laws increase the credit from $1,000 per child to $2,000. The refundable portion of the credit increases from $1,000 per child to $1,400. Additionally, more families will qualify for the credit as the income limit has increased from $75,000 for Single and Head of Household filers and $110,000 for Married filers to $200,000 for Single and Head of Household filers and $400,000 for Married filers.
Therefore, some families with children who qualify for the new Child Tax Credit laws may see more of a surprise at tax time, especially if they did not change their withholding. These families may see refund increases of up to about $400 more per child.
For example, a single elementary school teacher with two children making $50,117 (the average income in the Sacramento area) would have paid $1,625 in taxes last year. (Note: this would have been the amount of total tax, which should have been paid with withholding, so may not have been the amount owed on April 15th). Under the 2018 tax code, the same single school teacher with two children would now be getting a refund of $418 plus any withholding back.
What about individuals who claim relatives who do not meet the qualifications for the Child Tax Credit? Although the exemption amount for these dependents has been reduced to $0, there is an “other dependent” credit included in the new Child Tax Credit law. Tax filers with other dependents may still see a slight increase in their refunds, provided they had enough withholding to cover taxes when they filed their 2017 tax return.
Let’s consider the same school teacher, but this time filing a joint return with a spouse who does not work, and they claim two parents on their return. Last year they would have owed $2,250 before consideration of withholding. Under 2018 tax law, they will owe $1,753. This is nearly $500 that either will be added to their refund on tax day or that went straight into their pockets through withholding adjustments throughout 2018.
So, what’s the bad news? The most impactful change to the Child Tax Credit is a law requiring that all qualifying children must have a Social Security card. The parents do not have to have Social Security cards, but any child claimed on the return for the Child Tax Credit must have had a card issued. This will be a shock to some of our clients next season.
Last year a married couple with two children, all holding ITINs, would have owed $250 in taxes on a household income of $50,117. For 2018, the same family will owe $1,753. If the family does not adjust their withholding during 2018, this will cause a significant impact on their finances when they file in 2019.
Furthermore, ITIN families who file returns with refunds coming solely from the Child Tax Credit may be hurt due to a loss of significant income. For example, an ITIN family making $28,000 with two children would have received $2,000 last year. This year that same family will receive $0, a loss equivalent to nearly one month’s wages.
It is important to reach out to these impacted families and let them know they will not be able to count on the refunds they may have been expecting. Advocates can encourage and help them to use the Withholding Calculator on the IRS website https://www.irs.gov/payments/tax-withholding to adjust their withholdings appropriately.
The Withholding Calculator can be intimidating, especially for clients who understand limited English or are not comfortable on a computer. I encourage volunteers to walk through the calculator themselves to familiarize themselves. During tax season I would encourage volunteers to take the time, when appropriate, to walk through the calculator with clients. If clients have their paystubs with them, a new W-4 can be created using the calculator during the appointment.