For many upper middle class taxpayers, the idea of claiming the child tax credit has always been out of the question because of the previously applicable income restrictions.
The 2017 tax reform legislation, however, expanded the universe of clients who are now eligible to claim the child tax credit so that the credit is no longer limited, as historically has been the case, to lower income taxpayers—a change that may feel like a windfall to higher income clients. This expansion, when considered in light of the simultaneous liberalization of the Section 529 education savings plan rules, can dramatically increase the appeal of transforming the benefits of the child tax credit into a tax-preferred education savings bank for a client’s children.
Expansion of the Child Tax Credit
For tax years beginning after 2017 and ending before 2026, the 2017 tax reform legislation doubled the value of the child tax credit, increasing its total value from $1,000 to $2,000 per child under age 17 (i.e., a married couple with two children under 17 may receive an additional $4,000 per year, assuming they do not cross the income thresholds discussed below).
$1,400 of this per-child credit is now refundable, and only this refundable portion will be adjusted annually for inflation going forward. Because a portion of the child tax credit is refundable, the client may receive it even if he or she does not owe any additional taxes to the IRS (meaning that it can be received as a refund).
Importantly, the child tax credit now begins to phase out only when the client’s adjusted gross income (AGI) reaches $400,000 (for joint returns) or $200,000 (for all other filers). This is a substantial increase from the previously applicable income restrictions—prior to 2018, the child tax credit began to phase out when AGI reached $110,000 for joint returns or $75,000 for single filers. Once the client’s AGI reaches the applicable phaseout threshold, the credit amount is reduced by $50 for each $1,000 by which AGI exceeds the threshold.