YOUR REWARD FOR HAVING CHILDREN: CHILD TAX CREDIT
By: Victoria E. Paone, Esq.*
If you have young children, you may be able to save money this year (possibly thousands of dollars) when you file your federal income tax returns.
What has changed with regard to taxes and your children?
Pursuant to the Tax Cuts and Jobs Act of 2017, the tax credit that you receive for having a child under the age of seventeen doubled. Instead of receiving a credit for $1,000 per child, you will now receive a credit for $2,000 per child. This change concerns only your federal return, not your New Jersey state income tax return.
As a result of the new child tax credit, the Tax Cuts and Jobs Act of 2017 eliminated the dependency deduction.
Would I rather have a higher tax credit or the dependency deduction?
A higher child tax credit. The dependency deduction reduced your gross income so that you were taxed on a lower number than is reflected on your W-2. While a dependency deduction is a tax benefit, the child tax credit is far more valuable because it reduces your overall tax bill and could even result in a refund of thousands of dollars to you.
By way of illustration, if your tax liability amounts to $3,000 and you apply a child tax credit for $2,000, your tax liability will reduce to $1,000 for that tax year. Likewise, if you owe zero dollars in taxes to the IRS and apply a child tax credit for $2,000, then you may be refunded up to $1,400. That is right, you can get cash back for having children!
What are the necessary requirements for obtaining a child tax credit?
There are several requirements you must fulfill in order to take advantage of this tax savings, the most important of which include having a child under the age of seventeen and living with your child for more than half of the year. In the context of a divorce, the parent of primary residence, or the parent with whom the child resides for more than 50% of the time, is the parent who will primarily be able to benefit from this credit. Notwithstanding, parties going through a divorce may be able to negotiate an agreement such that the parties can alternate claiming this credit.
The new law also vastly expands who is eligible for the child tax credit. Prior to the Tax Cuts and Jobs Act of 2017, single taxpayers were required to earn a modified adjusted gross income totaling less than $75,000 and taxpayers filing jointly were required to earn a modified adjusted gross income totaling less than $110,000 to be eligible for the credit. Now, single taxpayers earning up to $200,000 and taxpayers filing jointly earning up to $400,000 can claim this credit. The increase in the income limitation permits more people with young children to take advantage of this credit.
Are there other child related credits to apply to tax returns?
Yes, the child and dependent care credit. This tax credit permits you to take up to $3,000 off of your tax bill for child care, babysitting and other similar expenses, however, the care must pertain to either children under the age of 13, an incapacitated spouse or parent, or another dependent.
Do I get a credit if my spouse watches the children while I am working?
Unfortunately, no. You cannot claim the credit if your care provider is your spouse or your other older child who is babysitting his or her younger sibling.
If you have young children, you should discuss your ability to claim the new child tax credit with your tax preparer. After all, tax credits are like free money!
* (Editor’s note: Victoria E. Paone, Esq. is an associate at the Law Offices of Paone, Zaleski & Murphy working out of the firm’s Red Bank office, located at 120 Maple Avenue. Victoria’s professional history includes clerking in Monmouth County for the Honorable Mara E. Zazzali-Hogan for both the Family part, Chancery Division and Civil Division for 2016-2017. She is currently a member of the New Jersey State Bar, Middlesex Bar Association, Monmouth Bar Association and Aldona E. Appleton Family Law Inn of Court. Victoria limits her practice to divorce, child support, child custody, equitable distribution, alimony, domestic violence, alimony, palimony and all other family law issues. Her monthly column, “Divorce Hotline,” will serve to inform readers as to family law news, advise as to the divorce process, comment on recently published family law cases and more. Paone, Zaleski & Murphy can be contacted at 732-750-9797.)