Talking Tax Reform - Part III
This blog is about the Child Tax Credit. To better understand this credit and credits in general, let's start with a primer on credits in general.
There are two basic types of credits. There are Indirect Credits and Direct Credits. An indirect credit is an entry on the tax return that reduces the amount of the taxpayer's income that is actually taxed. The Personal Exemption discussed in Part II of this series is an example of an indirect credit. So are the so-called "above the line" deductions like the Student Loan Interest Deduction, the Educator Expense Deduction and the Moving Expense Deduction.
A direct credit is a direct reduction in the amount of tax owed. One example is the Child Tax Credit that we are looking at in this blog. Let's compare the impact of a personal exemption and a child tax credit on a 2016 tax return. The taxpayer earned $50,000.
The personal exemption reduced that amount by $4,050 and as a result the amount of income being taxed is only $45,950.
The child tax credit directly reduces whatever that tax liability is by $1,000.
Now we have to further clarify the two types of direct credits. Those types are the Refundable Credit and the Non-Refundable Credit. The difference between the two is that a non-refundable credit can reduce the taxpayer's tax liability to zero, but cannot generate a refund. A refundable credit can reduce that tax liability below zero and generate a refund for the tax payer. This chart, from an article by Kelly Phillips Erb on the Forbes website is helpful.
The child tax credit is a relatively new credit. It was created in 1997 and was originally a credit of $400. Justification for the credit came about as part of a review of taxation by the Joint Committee on Taxation determined that the amount of the personal exemption did not accurately reflect a family's ability to pay taxes as the size of said family increased. The Bush tax cuts of 2001 and 2003 increased the child tax credit to the current amount of $1,000.
The credit has an income limitation. If the taxpayer's Adjusted Gross Income (AGI) exceeds $110,000 for a married filing jointly return, $75,000 for a single filer or a head of household and $55,000 for a married filing separately return, the credit begins to phase out. It is totally phased out at income levels of $130,000, $95,000 and $75,000 respectively.
The child tax credit is a nonrefundable credit, but it can become an Additional Child Tax Credit and thus transform into a refundable credit. The requirements are that there be some unused child tax credit after the taxpayer's liability has been reduced to zero and that the taxpayer's income be above a minimum level, or that they have a minimum number of dependents. You can see how this works by reviewing the Child Tax Credit Worksheet (found on page 5) and the Form 1040 Schedule 8812.
The Trump Tax Plan enhanced the child tax credit by doubling it to $2,000. It also is available to a much larger pool of taxpayers thanks to a generous increase in the phase-out AGI limits. Again, a great chart thanks to Kelly Phillips Erb
However, for those taxpayers whose tax liability was reduced to zero before the nonrefundable child tax credit could be used will not get a refundable amount of $2,000. They have capped the refundable portion of this credit at $1,400.
Still ahead, a look at the Family Credit, which is new. Also a look at the deduction for mortgage interest. And of course, a reminder that this so-called simplification/middle class tax cut is actually a gigantic giveaway to the richest Americans, being financed by adding $1.5 trillion to the national debt over the next decade.
There are two basic types of credits. There are Indirect Credits and Direct Credits. An indirect credit is an entry on the tax return that reduces the amount of the taxpayer's income that is actually taxed. The Personal Exemption discussed in Part II of this series is an example of an indirect credit. So are the so-called "above the line" deductions like the Student Loan Interest Deduction, the Educator Expense Deduction and the Moving Expense Deduction.
A direct credit is a direct reduction in the amount of tax owed. One example is the Child Tax Credit that we are looking at in this blog. Let's compare the impact of a personal exemption and a child tax credit on a 2016 tax return. The taxpayer earned $50,000.
The personal exemption reduced that amount by $4,050 and as a result the amount of income being taxed is only $45,950.
The child tax credit directly reduces whatever that tax liability is by $1,000.
Now we have to further clarify the two types of direct credits. Those types are the Refundable Credit and the Non-Refundable Credit. The difference between the two is that a non-refundable credit can reduce the taxpayer's tax liability to zero, but cannot generate a refund. A refundable credit can reduce that tax liability below zero and generate a refund for the tax payer. This chart, from an article by Kelly Phillips Erb on the Forbes website is helpful.
The child tax credit is a relatively new credit. It was created in 1997 and was originally a credit of $400. Justification for the credit came about as part of a review of taxation by the Joint Committee on Taxation determined that the amount of the personal exemption did not accurately reflect a family's ability to pay taxes as the size of said family increased. The Bush tax cuts of 2001 and 2003 increased the child tax credit to the current amount of $1,000.
The credit has an income limitation. If the taxpayer's Adjusted Gross Income (AGI) exceeds $110,000 for a married filing jointly return, $75,000 for a single filer or a head of household and $55,000 for a married filing separately return, the credit begins to phase out. It is totally phased out at income levels of $130,000, $95,000 and $75,000 respectively.
The child tax credit is a nonrefundable credit, but it can become an Additional Child Tax Credit and thus transform into a refundable credit. The requirements are that there be some unused child tax credit after the taxpayer's liability has been reduced to zero and that the taxpayer's income be above a minimum level, or that they have a minimum number of dependents. You can see how this works by reviewing the Child Tax Credit Worksheet (found on page 5) and the Form 1040 Schedule 8812.
The Trump Tax Plan enhanced the child tax credit by doubling it to $2,000. It also is available to a much larger pool of taxpayers thanks to a generous increase in the phase-out AGI limits. Again, a great chart thanks to Kelly Phillips Erb
However, for those taxpayers whose tax liability was reduced to zero before the nonrefundable child tax credit could be used will not get a refundable amount of $2,000. They have capped the refundable portion of this credit at $1,400.
Still ahead, a look at the Family Credit, which is new. Also a look at the deduction for mortgage interest. And of course, a reminder that this so-called simplification/middle class tax cut is actually a gigantic giveaway to the richest Americans, being financed by adding $1.5 trillion to the national debt over the next decade.
posted by me at 7:33 AM
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