When the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, it upended the U.S. tax code in a lot of ways. The dust is still settling and it can still make it a little challenging to prepare your 2019 tax year return in 2020. One big change affected the Child Tax Credit. It wasn’t eliminated by the TCJA as several other tax perks were. It was actually improved upon.﻿﻿ These rules apply from tax year 2018 through tax year 2025.

The tax year is the same as the calendar year for the majority of American taxpayers. It begins on Jan. 1 and ends on Dec. 31. Some sole proprietors and others elect to use a fiscal year accounting period for tax purposes, but all tax years mentioned here are measured in calendar years.

The Maximum Child Tax Credit

The maximum Child Tax Credit topped out at $1,000 per child through December 2017.﻿﻿ The TCJA increased that to $2,000 per child beginning in tax year 2018, but this doesn’t necessarily mean that all qualifying taxpayers will receive this much. Certain terms and conditions can whittle away at this cap.﻿﻿

Qualifying Children

One aspect of the Child Tax Credit hasn't changed—as the name suggests, you must have a qualifying child dependent. The rules for exactly who qualifies are somewhat intricate. The child can't yet have turned 17 by Dec. 31, the last day of the tax year, and they must be related to you.﻿﻿ But the definition of “related” for purposes of this credit 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 the children of any of these individuals.

Your qualifying child can't pay for more than half their own support needs during the tax year if the have any income of their own. In most cases, they must have lived with you, in your home, for more than half the year, but temporary absences such as living away at school for a period of time don't count.

Your child must be a U.S. citizen, a U.S. national, or a U.S. resident alien, and you must claim them as a dependent on your tax return.﻿﻿

Your Child Needs a Social Security Number

Your qualifying child must have a valid Social Security number, and you must provide it to the IRS when you file your tax return and claim the credit.﻿﻿

This Social Security number requirement has been in place since 2018. It used to be that you could claim the Child Tax Credit retroactively in a later year if your child didn't have a Social Security number by the time your tax return was due, but that provision has been eliminated.

The Center on Budgeting and Policy Priorities estimated in late 2017 that this will eliminate as many as 1 million children in low-income families.﻿﻿

The Refundable Portion of the Child Tax Credit

The Child Tax Credit was essentially a nonrefundable credit through the 2017 tax year. It could reduce or eliminate the tax you owed to the IRS, but any portion of the credit that might have been left over would just disappear. The Internal Revenue Code provided for an Additional Child Tax Credit that was potentially refundable to balance this.

The TCJA eliminated the Additional Child Tax Credit…sort of. It more or less consolidated these two 2017 tax credits—the Child Tax Credit and the Additional Child Tax Credit—into one. Beginning with tax year 2018, up to $1,400 of the $2,000 Child Tax Credit can be refundable.﻿﻿ If any part of your credit is left over after eliminating your tax debt, the IRS will send you a refund of up to $1,400.

That $1,400 can be expected to increase a little in future years because the 2018 tax law indexed it to keep pace with inflation.

All this is subject to more rules, of course. You must have earned income, such as from a job or self-employment, to qualify for the refundable portion. Nontaxable combat pay also qualifies, but investment income won’t cut it—that’s considered “unearned.” Unemployment benefits, public assistance, and worker’s compensation benefits are also considered to be unearned income.﻿﻿

Calculating the Refundable Portion

You won’t necessarily be receiving that entire $1,400 even if you meet the earned income rule. Remember, the TCJA says the refundable portion of the credit is "up to" this amount.

The refund is actually equal to 15% of your earned income over $2,500.﻿﻿ A taxpayer would therefore need earned income of approximately $12,000 a year to qualify for and receive the full $1,400 refund: $12,000 less $2,500 is $9,500, and 15% of $9,500 works out to $1,425.

This taxpayer with earned income of $12,000 would forfeit that extra $25 because the refundable portion of the credit caps out at $1,400.

That $2,500 earned income requirement is actually an improvement, however. The threshold used to be $3,000 through 2017 while the Additional Child Tax Credit still applied—$500 more, putting it a little further out of reach for very low-income families.﻿﻿

Even at $2,500, some of the neediest American families won’t qualify for the refundable portion, or at least they won't qualify for the entire refundable portion if they don't have earned income of at least $12,000 or so. A family with earned income of just $10,000 would receive only $1,125 under the law. A family getting by on some form of unearned income would receive nothing.

IRS Publication 972 includes a worksheet to help you figure out the refundable portion of your Child Tax Credit.

Child Tax Credit Phase-Outs

The Child Tax Credit is also subject to income phase-outs for taxpayers who earn too much money. When their incomes reach a certain point, the overall credit is reduced by 5% of the amount over the phase-out limit until it's eliminated entirely.﻿﻿

But the TCJA changed this rule, too—in favor of wealthier families. As of the 2019 tax year, the phase-out begins for married taxpayers at a pretty significant $400,000. They can earn this much without losing any of their Child Tax Credit. The phase-out begins for all other taxpayers at $200,000.﻿﻿

An unmarried taxpayer earning $210,000 wouldn't receive a $2,000 credit, but rather $1,500. That $10,000 over the threshold would shave 5% of that amount or $500 off the credit.

Each $1,000 earned over these amounts reduces the Child Tax Credit by $50.

This is still significantly better than the Child Tax Credit rules that were in place for the 2017 tax year. The beginning phase-out limit for married taxpayers filing jointly was just $110,000 in 2017. It was a mere $55,000 for married taxpayers who filed separately, and $75,000 for all other taxpayers.﻿﻿

MAGI vs. Gross Income

These income thresholds are based on your modified adjusted gross income or MAGI, not your entire earnings. Many taxpayers find that their MAGIs are the same as their adjusted gross incomes, which can be found on line 8b of the revised 2019 Form 1040 tax return.﻿﻿ You can calculate your MAGI by adding back certain deductions you might have taken to arrive at your AGI, such as for IRA contributions, half the self-employment tax, or rental losses.﻿﻿

Overall, the more you earn, the more you’ll benefit from this tax credit going forward—at least until your income tops $200,000 or $400,000. And if you have no earned income at all, the Child Tax Credit can't help you.

The Credit for Other Dependents

You might also be able to claim an additional $500 credit for your non-child dependents. The TCJA provided for this “Credit for Other Dependents” in 2018. It's been familiarly referred to as the "Family Tax Credit." All the old rules for claiming adult dependents on your tax return still apply. They’re largely the same as they are for qualifying child dependents, covering those who don’t meet the age requirement for the Child Tax Credit.﻿﻿﻿﻿