2018 Trump Tax Plan Changes Needed for Writing Off Dependents

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One of the frequent questions I’ve heard over the years is, “Can I write off my mother (or father, college aged student, disabled adult child, etc)?”

If you ever asked that, then you already know the drill on what it took to get the deduction. That was then. This is now.

This is how it works now for 2018. There are no longer any exemptions. Not for you. Not for your kids. Not for other dependents.

In some cases, though, you can get tax credits. Here are the bullet points about how the new Child Tax Credit and the Qualifying Dependent Tax Credit will work.

Here are the bullet points:

  • A tax credit is better than a tax deduction, because a credit reduces the actual tax paid while a deduction reduces the taxable income. The tax credit is dollar-for-dollar money in your pocket. A tax deduction is multiplied by your marginal tax rate and then that’s the money in your pocket.
  • The Trump Tax Plan Child Tax Credit is $2,000 per qualifying child.
  • A qualifying child must be under the age of 17 at the end of the year.
  • The child must be related to you. The definition of “related” in this case is broader than you might expect. The list of qualifying children includes biological and adopted children, stepchildren, foster children living in your care, siblings, stepsiblings, or a child of any of these individuals.
  • If your qualifying child has any income of his own, he or she cannot pay for more than half of the personal support needs during the tax year. In most cases, he or she must have lived with you, in your home, for more than half the year.
  • In order to qualify for the Child Tax Credit, your child must be a U.S. citizen, a U.S. national, or a U.S. resident alien.
  • Your child must have a Social Security number and you must provide it to the IRS when you file your tax return and claim the credit. Prior to 2017, you could claim the Child Tax Credit retroactively in a later year if your child did not have a Social Security number by the time your tax return was due. That provision has been eliminated for 2018. You must have a Social Security number prior to year end.
  • If a child has divorced parents, only one parent is eligible for the child tax credit under tax law.
  • Usually, the custodial parent will claim the credit. However, if the custodial parent has released the exemption, then the noncustodial parent can claim it. Additionally, divorce or custody agreements usually show who claims the credit, although in the past it was the dependency exemption that was usually up for grabs. That’s gone now, so it’s possible that those agreements will need to be adjusted as well.

Refundable Tax Credit

  • Part of the Child Tax Credit is refundable. The refundable portion maxes out at $1,400. A refundable tax credit means that you can receive cash over and above the amount of tax you’ve paid in.
  • A nonrefundable credit can be used to reduce a taxpayer’s bill all the way down to zero, but not beyond. A refundable tax credit can be given even if a taxpayer ends up with no tax liability at all. If your calculated tax for the year is $1,000, and you have $1,500 in refundable tax credits to claim, you can reduce your tax bill to zero and get that extra $500 ($1,500 – $1,000) sent to you.
  • The earned income threshold for the refundable credit was lowered to $2,500. In other words, if you have earned income that is less than $2,500, you will not receive a refundable tax credit. However, you still may be able to receive a Tax Credit.
  • Refundable tax credits are better, especially for lower-income American taxpayers.

Other Dependent Tax Credit

  • Starting in 2018, under new rules established by the Tax Cuts and Jobs Act, there’s also a nonrefundable $500 credit available for dependents who don’t meet the definition of a qualifying child.
  • This partial credit is available for qualifying relatives.
  • A qualifying relative could be a parent or grandparent, stepparent, aunt or uncle, niece or nephew, in-laws, or someone who lives in your home all year long.
  • You need to provide half the financial support for the qualifying relative in order to get the credit.
  • The dependent can’t earn more than $4,150 (as of 2018).

All of that leads to a half dozen or more new tax strategies. Put them in place for 2018 and you will get even more tax cuts!

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