Tax Credit Changes
Part 4 of 4
For the past 3 weeks you have already learned that the short answer is: YES! The changes will have some positive and negative effects on taxpayers, and we want you to be in the know about how they will affect you. We’ve broken things down to show you who is winning and who is losing with each change, and fortunately this week, the changes will make nearly everyone a winner.
FACT: The new tax reform bill will impact nearly every taxpayer in the country due to increases in the available tax credits
First let’s break down what a tax credit is – in short, it is a dollar for dollar reduction in the amount of tax you owe. For example, if you received a “tax bill” for $5,000, and you had a $1,000 tax deduction, that would only decrease your tax bill by about $250. With that same example, if you had a $1,000 tax credit, that reduces your tax bill by $1,000. For most taxpayers, the best tax benefit you can receive is to be eligible for tax credits.
The most common tax credits are those for families with children. And the tax reform bill expanded the amounts and eligibility for family related credits.
The child tax credit has been included in the tax code for quite some time, and for 2017 it was up to $1,000 per child under the age of 17. For 2018, this credit was doubled to $2,000. Plus, the eligibility for this credit was extended to allow higher income earners to take advantage of the credit as well. For 2017, single filer earning over $75,000 would be ineligible for the credit. However, for 2018, single filers with income up to $200,000 will now be eligible for the credit. This is a significant change, that will serve to benefit many more families with younger kids.
Further, a new non-child dependent credit was created for dependents who are over the age of 17. This credit is $500 per dependent and can include older children, or other relationships that result in qualified dependents. This too will serve to benefit families with several dependents.
While the expansion of these credits is great news, remember, it is in your best interest to know about the changes, and then take action to either minimize the negative, or maximize the positives. In this case, you don’t want to wait until April to take advantage of this new tax credit.
With each pay check, you’re paying your tax obligation for the year. If you will be eligible for new and increased tax credits, that means you need to pay in less each pay check to meet your tax obligation. Given that, it makes sense to review your eligibility, and then adjust your W-4 to reduce the amount of tax withheld from your check each pay period. Assessing your eligibility for this tax credit is easy. Follow these simple steps:
First, Review your 2017 tax return:
If you received the child tax credit last year:
- Estimate your income in 2018: Will increase significantly from last year to exceed the income thresholds for eligibility?
- Is your child is turning 17 during the 2018 tax year?
If you answered no to both these questions, you should be eligible for the $2,000 credit. If your child is turning 17 or older, you should be eligible for the $500 credit.
If you did not receive the child tax credit last year:
- Do you have a qualifying child, under the age of 17 for 2018?
- Estimate your income in 2018: Will it fall under the income thresholds for eligibility?
If you answered yes to both these questions, you should be eligible for the $2,000 credit. If your child is turning 17 or older, you should be eligible for the $500 credit.
Once you’ve assessed your eligibility and the amount of the credit you should qualify for, you can contact your employer to update your W-4, increase your allowances and increase your take home pay each pay period. Need help with this process? Contact us and we can prepare a simple tax analysis and W-4 update for you.