2 Tax Credits to Pay Attention to in 2018

With the changes in 2018 due to the TCJA, it’s more important now than ever to ensure you understand your potential tax credits.

First, What is a Tax Credit?

A tax credit reduces the amount of taxes you owe, dollar for dollar. For example, if you have a tax liability of $4,000 & you receive a credit of $500, your taxes will now be $3,500. Make sense?

Keep in mind that some tax credits are refundable, partially refundable, and some are not refundable at all. Meaning if your credit reduces your tax liability below zero, you may or may not get a refund due to the credit. Consult your local tax pro or check out our list here.

With the changes in 2018 due to the TCJA, it’s more important now than ever to ensure you understand your potential tax credits. Why? Simply because tax deductions, which typically fall on a schedule A, may become more difficult to reach as the standard deduction limit doubled in 2018. We’ll cover this in another article. Here are 2 of the most popular credits to watch for 2018.

The Earned Income Tax Credit

This credit is for working people who have low to moderate income. The IRS looks at this credit very closely as it is a refundable credit. To claim this credit, you must meet ALL the following rules:

  • You, your spouse (if you file a joint return), and all others listed on Schedule EIC, must have a Social Security number that is valid for employment and is issued before the due date of the return including extensions
  • You must have earned income from working for someone else or owning or running a farm or business
  • Your filing status cannot be married filing separately
  • You must be a U.S. citizen or resident alien all year (If you are a nonresident alien married to a U.S. citizen or resident alien, see Publication 519, U.S. Tax Guide for Aliens)
  • You cannot be a qualifying child of another person
  • You cannot file Form 2555 or Form 2555 EZ (related to foreign earned income)
  • You must meet the earned income, AGI and investment income limits (income limits change each year), see EITC Income Limits for the tax year amounts
  • And you must meet one of the following:
    • Have a qualifying child (see who is a qualifying child below)
    • If you do not have a qualifying child, you must:
      • be age 25 but under 65 at the end of the year,
      • live in the United States for more than half the year, and
      • not qualify as a dependent of another person.

If you qualify for EITC, you must file a tax return with the IRS, even if you owe no tax or are not required to file.

Child Tax Credit

For 2018, the CTC has doubled from $1,000 to $2,000 per child. This credit is available for children who are under the age of 17. You cannot claim this credit for any child who turns 17 in the current tax year.
Another important change for the CTC is that more of the credit will be refundable. The TCJA has made up to $1,400 of the credit refundable; however, the refundable portion of this credit is capped at 15% of your earned income more than $4,500. This means that if your earned income is greater than $13,833, your refundable credit Amount is only capped by the $1,400 limit, and if it is less, the refund able portion of the credit can be reduced.

The last substantial change is that income thresholds have risen dramatically. In 2018, the CTC will be available to more households. Here’s a quick guide to the CTC phaseout for 2018:

 

Filing Status Max AGI Full Credit AGI where CTC is Gone
Single $200,000 Over $240,000
Married filing jointly $400,000 Over $440,000
Head of Household $200,000 Over $240,000
Married filing separately $200,000 Over $240,000

 

If your income falls between the two thresholds for your filing status – you can still claim a partial credit. The CTC you claim will be reduced $50 for every $1,000 of MAGI that exceeds the lower threshold. There are a lot more tax credits than just these two.

Here’s a list of some other common tax credits:

  • Child and Dependent Care Credit (designed to help offset the cost of childcare or taking care of an elderly parent)
  • Adoption Credit (for adoption expenses)
  • Premium Tax Credit (for people who purchased health insurance through the federal marketplace)
Talk with your tax professional to make sure you understand & are taking advantage of as many as you can!

About the Author

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Joseph A. Davis, EA, CDFA®

Director

With over 13 years in the financial services industry, Joe knows his stuff. Cursed with the desire to be a serial entrepreneur - Joe is a real estate investor & managing partner for Davis Financial LLC, Utah Divorce Services and Tax Smart Pros. He most recently became the director for Find a CPA Today. Joe is an Enrolled Agent, EA, & CDFA®. He also holds FINRA licenses 7, 66 & 24. When Joe isn't trading, looking for new real estate investments or obsessing over his work - you can find him at home, playing with his children & probably mowing his lawn.

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