Tax reform effect on mothers will depend on the family
Children might be more valuable (tax-wise) this Mother’s Day, since tax reform doubled the child tax credit to $2,000. But Alison Flores, principal tax research analyst at The Tax Institute at H&R Block, says there is more to the financial picture than that single credit, and each family will need to look at their unique situation to determine what changes will impact them. And although understanding tax changes will be important, it won’t replace thoughtful gifts this Mother’s Day.
“You shouldn’t pay more taxes than you have to, and that’s what your tax pro is for, but gratitude and affection from your kids on Mother’s Day are going to be more meaningful than tax advice,” said Flores.
Dependent exemption of $4,000 each is eliminated
First, the bad news: tax reform eliminated a more than $4,000 deduction in 2018 for each taxpayer, spouse and qualifying child or relative. This deduction for personal and dependent exemptions reduced taxable income. Without it, more of a taxpayer’s income is potentially subject to taxation.
“It’s important not to look at any one change in isolation because it’s most likely you will be affected by a few changes. How you come out overall will change family to family,” said Flores. “So while the loss of exemptions for your children might seem worrisome, especially if you have more than one child, there are other changes that will likely more than make up for it.”
Child tax credit for 2018 and beyond doubles to up to $2,000 per child
The biggest among those changes that might make up for the loss of the dependent exemption is the doubled child tax credit. In the past, parents could get a credit of up to $1,000 for each child under 17, but the credit phased out at adjusted gross income (AGI) of $110,000 for married taxpayers filing a joint return or $75,000 for single and head of household parents. Now, not only does the credit double from $1,000 to $2,000, but up to $1,400 of the credit for each child is refundable. And more taxpayers will be eligible to claim the credit because the AGI phaseout increases to $400,000 for married filing joint and $200,000 otherwise.
“Even though a $2,000 child tax credit sounds like less than a $4,000 dependent exemption, it could potentially be a better tax benefit. Not only can the child tax credit directly reduce your taxes owed, but if you don’t owe any taxes, you can still potentially get a refundable child tax credit of up to $1,400 for each child,” said Flores. “An exemption can’t directly reduce taxes, only taxable income, and it doesn’t do anything if you do not owe taxes.”
New tax credit of $500 for other dependents
Families with dependents who don’t qualify for the $2,000 child tax credit may qualify for a new tax credit of $500 per other dependent. Not only would this apply to older children parents are still supporting, like students just starting college, but it could also apply to other dependents, like elderly parents.
“2018 is a bad year to turn 17, from a tax standpoint. Not only will their parents lose their $4,000 exemption like everyone else, but they also will not be eligible for the $2,000 child tax credit. But, the new $500 credit will help families as their kids grow up,” said Flores. “Still, having kids grow up can really change a family’s tax situation, so it’s an important time to work with a tax professional to make sure paycheck withholding will cover their changing tax bill.”
Adoption credit is unchanged
Adoptive families may continue to use the federal adoption tax credit which is worth up to $13,810 for each child they adopt. The adoption credit can zero out taxes owed for a year. If the credit is larger than tax liability, the credit can zero out taxes owed for the year and the remainder will carry over for up to five years.
No changes to head of household status
The head of household status is important for single parents because it can give them better tax benefits than filing as single would. The head of household status is more beneficial than the single filing status because it has lower taxes, a larger standard deduction and higher income thresholds for some tax benefits, like the saver’s credit.
“You can file as head of household if you are unmarried at the end of the year and paid more than half the cost of maintaining a home for more than half the year for a qualifying child or qualifying relative for head of household purposes,” said Flores. “The qualifications for head of household filing status can be complex and the benefits can be significant, so it’s important to talk to a tax professional to make sure you aren’t missing out on the head of household status.”
Deciding who claims a child on taxes if not married, or if a married couple chooses to file separately, can be complicated.