New tax rules that went into effect last year mean big changes to the way millions of Americans do their taxes — and especially parents. While most families should see a tax cut, that’s not true for everybody.
When Congress passed the Tax Cuts and Jobs Act in 2017, among the biggest goals were to simplify and lower taxes for everyday tax payers. The law did this by nearly doubling the standard deduction — the amount taxpayers who don’t itemize are allowed to lop off their taxable income before figuring what they owe — to $24,000 from $13,000 for married filers (and to $12,000 from $6,500 for singles.)
The enlarged standard deduction is a big boon for taxpayers, potentially saving many families hundreds or even thousands of dollars a year. But to make it possible, policymakers had to rejigger many other parts of the tax code, including some that have long benefited parents.
To offset the cost of expanding the standard deduction, one of the bill’s most expensive provisions, Congress eliminated another longtime perk: the $4,050 personal exemption that taxpayers could previously claim for themselves, a spouse, and each dependent. Because taxpayers could claim an exemption for each child, simply eliminating the provision would have meant tilting the benefits of the tax code away from parents.
To fix this, Congress sweetened another perk targeted at families—doubling the value of the Child Tax Credit to $2,000 from $1,000 and dramatically raising the income threshold at which it begins to phase out, to $400,000 for couples from $110,000, ensuring that many more families will be able to take it. The change “will benefit families across the income spectrum,” says Tax Foundation analyst Erica York.
How Families Fare
A married couple with two small children who earn $80,000 and don’t itemize will end up owing about $2,240 less in 2019, according to the Tax Policy Center’s tax calculator. With a third child, their savings would increase to nearly $2,620.
The New Credit’s Limits
Some tax experts have complained the new Child Tax Credit isn’t as generous to low-income families as it might have been. While the old $1,000 version was refundable (with certain restrictions), only $1,400 of the new credit is. That means families without $2,000 of income tax liability per child won’t be able to claim the full amount.
Kids’ Ages Matter
Under the old rules you could claim an exemption for each child under age 19, as well as any child age 19 to 24 who was also a student. By contrast, the new, expanded Child Tax Credit is available only for kids age 16 and under. To address this discrepancy, Congress created yet another new perk: a $500 nonrefundable tax credit for any dependent who isn’t eligible for the Child Tax Credit.