Child Tax Credit: Significantly Expanded For 2018 And Beyond

October 19th, 2018
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The tax law signed by President Trump in 2017 brought several new changes for physicians and other high-income professionals.

One helpful change for families with children is the expansion of the Child Tax Credit, both in the dollar amount of the credit along with the number of families who are eligible for the tax credit.

In the past, physicians making the typical attending salary would be ineligible for the Child Tax Credit because of their high income. But now, many physicians will be eligible to claim this $2,000 credit per child on their taxes beginning in 2018.

[Disclaimer: As always, check with your accountant for definitive advice regarding the Child Tax Credit and other tax questions. I’m just a physician, not an accountant or financial advisor.]

Child Tax Credit Basics

The Child Tax Credit was introduced in 1997 as part of that year’s tax cut package. At the time, it was worth only $500 per child. It was expanded to $1,000 per child as part of the 2001 Bush tax cuts. The 2017 Tax Cuts and Jobs Act expanded the tax credit even further, to $2,000 per child.

This tax credit provides families with some assistance with the financial costs of raising their children. Of course, the tax credit represents only a small fraction of the cost of raising a child, but every little bit helps from the government. In addition to the tax credit, children usually are claimed as dependents, which used to enable parents to get an additional tax break from their children in the form of a personal exemption.

How old can my child be to qualify for the tax credit?

You need to have a qualifying child who is less than 17 (16 or younger) to claim the Child Tax Credit.

You cannot claim the Child Tax Credit when your child is 17 or older at the end of the tax year (for example, in 2018, children born on December 31, 2001, or earlier do not qualify).

However, you can claim the tax credit in the year your new baby is born. And in the year your child is born, you get the full tax credit, whether he or she is born on January 1st or December 31st of that year. You don’t claim a partial-year credit if your child is born in the middle of the year.

Tax Cuts And Jobs Act Changes To The Child Tax Credit

As part of the new tax bill signed into law in 2017, the Child Tax Credit was expanded from $1,000 per child to $2,000 per child.

However, the $4,050 personal exemption that was previously able to be claimed by parents for their children was eliminated from the new tax law. This meant that for some families, the effective increase in the higher child tax credit was partially offset by the elimination of the personal exemption.

However, the big change in the Child Tax Credit as it affects physicians and other high-income professionals is the increase in the income phase-out levels. Previously, the Child Tax Credit would begin to phase out at a modified adjusted gross income (MAGI) of $110,000 for married taxpayers.

However, with the new tax law, families earning up to $400,000 MAGI would be eligible for the full $2,000 tax credit.

The Child Tax Credit begins to phase out at incomes greater than $400,000. For every increase of $1,000 in MAGI above $400,000, the tax credit declines by $50. This means that families making up to $440,000 MAGI can claim at least a partial credit.

Biggest Beneficiaries Of The New Child Tax Credit: Physicians!

Married couples who have MAGIs in the $313,800-$400,000 range, which include many physicians, are the biggest beneficiaries of the new child tax credit rules. This is because, under previous tax law, married couples in this income range were not only ineligible to claim the Child Tax Credit, but the personal exemption they could claim for their children was reduced from the full $4,050 because of their high incomes.

With the new tax law, not only do married couples in this income range gain the full $2,000 tax credit, but they lose less by the elimination of the personal exemption than individuals with lower incomes.

Conclusion

The new tax law greatly increases the number of families who are eligible for the Child Tax Credit, including many physicians and other high-income professionals. Families with up to $400,000 in modified adjusted gross income can claim the full $2,000 child tax credit, and families earning between $400,001 and $440,000 in MAGI can claim a partial tax credit. The personal exemption is eliminated from the new tax law, but many physicians and other high-income professionals were already beginning to get phased out from that exemption, making them one of the biggest beneficiaries of these changes in the Child Tax Credit rules.

What do you think? How will the new Child Tax Credit rules from the 2017 Tax Cuts and Jobs Act affect your taxes?

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11 COMMENTS

  2. If we are filling our taxes “married filing separately” to take advantage of lower IBR or PAYE payments while pursuing PSLF then who should take the child tax credit and list the child as a dependent?

    • I’m pretty sure it applies to a MAGI of up to $400k if you are married filing jointly. For married filing separately, I think it is up to $200k.

      My wife file “Married filing separately” to take advantage of lower IBR while pursuing PSLF just like you.

  3. The baby’s due in November, and he’s already spent more than $2,000 in crib, car seat, stroller, clothes and more. Nonetheless, the tax credit is welcome.

    Please define “Tax credit”. Does that mean that $2000 per child is deducted from the tax bill?

    Or does it mean that $2000 is deducted from the income (like a business expense) to lower the taxable income?
    Thanks

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