Ready or not, tax season is here! By now, most of you are aware of the major changes taking place under the Tax Cuts and Jobs Act (TCJA). Standard deductions are now doubled, dependency exemptions are gone, and many itemized deductions have been either reduced or eliminated completely. However, tax credit changes under the new law have largely gone under the radar. We would like to take time to highlight a few of these credit changes in effect in tax year 2018.
Child Tax Credit
The child tax credit (CTC) is a non-refundable credit that has assisted taxpayers in recovering some of the cost of raising children since 1998. Over the years it has seen a number of increases, and in 2017 the credit was $1,000 per qualifying child. The Tax Cuts and Jobs Act (TCJA) changes the child tax credit for tax year 2018. Below is a summary of the changes you can expect:
Additional Child Tax Credit
The additional child tax credit (ACTC) is available to those with lower tax liabilities that are unable to take advantage of the full $2,000 child tax credit. Unlike the child tax credit, the ACTC is refundable. The refundable portion of the ACTC increased to $1,400 in 2018 up from $1,000 in recent tax years. The refundable portion of the credit only applies when if you are unable to fully use the $2,000 CTC to offset your tax liability. In other words, if you don’t owe any tax before claiming the credit, you may receive up to $1,400 for each qualifying child as part of your refund. The refundable amount will be adjusted for inflation in future years.
It is important to note that taxpayers cannot claim a child tax credit or the additional child tax credit for a child who does not have a Social Security Number (SSN) by the due date of the return (April 15, 2019).
Non-child dependent credit
Starting in 2018, the TCJA allows a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit. Dependents eligible for the partial credit include "qualifying relatives" that previously qualified for the dependency exemption. There is no age limit for the $500 credit, however the potential dependent must still meet tax tests for dependency (relationship, income, and support). The credit may apply to taxpayers who support a dependent that is a full-time student, a parent, or disabled. There is no SSN requirement to claim this credit, so taxpayers can claim the credit for children with an Individual Tax Identification Number (ITIN) or an Adoption Tax Identification Number (ATIN) as long as the dependency tests are met.
Paid Family and Medical Leave Credit
Thanks to the TCJA, there is a new tax credit intended to help businesses reduce their taxes while an employee is on paid leave from his or her job duties due to specified reasons. The credit is available for eligible employers that pay qualifying employees at least 50% of their salary while on family and medical leave for up to 12 weeks in a year. Additionally, the employer must have a written policy in place that requires the employer to provide at least two weeks annually of paid family and medical leave to qualifying employees other than part-time employees. It is important to note that the credit is available only for the 2018 and 2019 tax years, which may limit its usefulness for employers without a written policy currently in place. If you believe you may benefit from the PFML credit contact our office for further information.
Adoption Tax Credit
The TCJA retained the adoption tax credit. This credit is available to offset the costs of adoption for each child. The credit amount has been increased to $13,840, and will be adjusted in future years for inflation. The phaseout range for the credit begins at $207,140 for married taxpayers filing jointly, and is unavailable for those above $247,140 (MFJ). To qualify, the child must be under 18 years old and must not be a step child.
Building Credits
The Tax Cuts and Jobs Act (TCJA) includes a couple of key changes for real estate investors who are planning to renovate their properties. For one thing, the TCJA completely eliminates the rehabilitation credit, or “rehab credit.” For another, it reduces the tax benefit of the historic structures credit. While the 20% historic structures credit is retained, the credit must be claimed ratably over five years.
Residential Energy Credits
There have also been some significant changes to available residential energy credits. For the 2018 tax year, the nonbusiness energy property credit is no longer available. However, the residential energy efficiency property credit has been extended under TCJA through 2021. The residential energy efficiency property credit is worth 30 percent of the cost of alternative energy equipment installed on or in your home, and includes the cost of installation. Some examples of eligible costs include equipment for solar, wind, geothermal, and fuel cell technology. Energy Star products are also eligible for the tax credit. There is no dollar limit on the credit for most types of property and, if the credit is more than the tax owed, the unused portion can be carried forward to future years. If you believe you are eligible for either of these energy credit, be sure to discuss and provide all relevant documentation to your preparer at the time of your return preparation.
Foreign Tax Credit
The foreign tax credit is available to taxpayers who paid or accrued foreign taxes to a foreign country or US possession and are subject to US tax on that income. You may be able to take either a credit or an itemized deduction on Schedule A for those taxes. The foreign tax credit is limited to tax on the ratio of foreign taxable income to total taxable income. The biggest change under the TCJA, is that foreign taxes are now included in the $10,000 limit on state and local taxes (excluding amounts paid for foreign property taxes). The TCJA also added a dividends-received deduction for domestic corporate shareholders equal to the foreign-source portion of dividends received from certain foreign corporations. If this credit applies to you, contact your preparer to further discuss your situation.
Child Tax Credit
The child tax credit (CTC) is a non-refundable credit that has assisted taxpayers in recovering some of the cost of raising children since 1998. Over the years it has seen a number of increases, and in 2017 the credit was $1,000 per qualifying child. The Tax Cuts and Jobs Act (TCJA) changes the child tax credit for tax year 2018. Below is a summary of the changes you can expect:
- Higher credit amount: The 2018 child tax credit is now $2,000 per qualifying child (up from $1,000 in previous tax years). The child must be under 17 at the end of the tax year (12/31/18) to claim it, and meet the same requirements for pertaining to the dependency exemption in prior years. These requirements include the relationship test, the income test, and the support test.
- Higher phaseout ranges: While the child tax credit retains a phaseout range in 2018, the phaseout amounts are much higher. The 2018 phaseout starts at $400,000 for joint filers and $200,000 for a single taxpayer. Previously, the credit began to phase out at $110,000 for joint filers, $55,000 for married filing separately, and $75,000 for all others. The higher phaseout levels allow more taxpayers to take advantage of the child tax credit.
Additional Child Tax Credit
The additional child tax credit (ACTC) is available to those with lower tax liabilities that are unable to take advantage of the full $2,000 child tax credit. Unlike the child tax credit, the ACTC is refundable. The refundable portion of the ACTC increased to $1,400 in 2018 up from $1,000 in recent tax years. The refundable portion of the credit only applies when if you are unable to fully use the $2,000 CTC to offset your tax liability. In other words, if you don’t owe any tax before claiming the credit, you may receive up to $1,400 for each qualifying child as part of your refund. The refundable amount will be adjusted for inflation in future years.
It is important to note that taxpayers cannot claim a child tax credit or the additional child tax credit for a child who does not have a Social Security Number (SSN) by the due date of the return (April 15, 2019).
Non-child dependent credit
Starting in 2018, the TCJA allows a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit. Dependents eligible for the partial credit include "qualifying relatives" that previously qualified for the dependency exemption. There is no age limit for the $500 credit, however the potential dependent must still meet tax tests for dependency (relationship, income, and support). The credit may apply to taxpayers who support a dependent that is a full-time student, a parent, or disabled. There is no SSN requirement to claim this credit, so taxpayers can claim the credit for children with an Individual Tax Identification Number (ITIN) or an Adoption Tax Identification Number (ATIN) as long as the dependency tests are met.
Paid Family and Medical Leave Credit
Thanks to the TCJA, there is a new tax credit intended to help businesses reduce their taxes while an employee is on paid leave from his or her job duties due to specified reasons. The credit is available for eligible employers that pay qualifying employees at least 50% of their salary while on family and medical leave for up to 12 weeks in a year. Additionally, the employer must have a written policy in place that requires the employer to provide at least two weeks annually of paid family and medical leave to qualifying employees other than part-time employees. It is important to note that the credit is available only for the 2018 and 2019 tax years, which may limit its usefulness for employers without a written policy currently in place. If you believe you may benefit from the PFML credit contact our office for further information.
Adoption Tax Credit
The TCJA retained the adoption tax credit. This credit is available to offset the costs of adoption for each child. The credit amount has been increased to $13,840, and will be adjusted in future years for inflation. The phaseout range for the credit begins at $207,140 for married taxpayers filing jointly, and is unavailable for those above $247,140 (MFJ). To qualify, the child must be under 18 years old and must not be a step child.
Building Credits
The Tax Cuts and Jobs Act (TCJA) includes a couple of key changes for real estate investors who are planning to renovate their properties. For one thing, the TCJA completely eliminates the rehabilitation credit, or “rehab credit.” For another, it reduces the tax benefit of the historic structures credit. While the 20% historic structures credit is retained, the credit must be claimed ratably over five years.
Residential Energy Credits
There have also been some significant changes to available residential energy credits. For the 2018 tax year, the nonbusiness energy property credit is no longer available. However, the residential energy efficiency property credit has been extended under TCJA through 2021. The residential energy efficiency property credit is worth 30 percent of the cost of alternative energy equipment installed on or in your home, and includes the cost of installation. Some examples of eligible costs include equipment for solar, wind, geothermal, and fuel cell technology. Energy Star products are also eligible for the tax credit. There is no dollar limit on the credit for most types of property and, if the credit is more than the tax owed, the unused portion can be carried forward to future years. If you believe you are eligible for either of these energy credit, be sure to discuss and provide all relevant documentation to your preparer at the time of your return preparation.
Foreign Tax Credit
The foreign tax credit is available to taxpayers who paid or accrued foreign taxes to a foreign country or US possession and are subject to US tax on that income. You may be able to take either a credit or an itemized deduction on Schedule A for those taxes. The foreign tax credit is limited to tax on the ratio of foreign taxable income to total taxable income. The biggest change under the TCJA, is that foreign taxes are now included in the $10,000 limit on state and local taxes (excluding amounts paid for foreign property taxes). The TCJA also added a dividends-received deduction for domestic corporate shareholders equal to the foreign-source portion of dividends received from certain foreign corporations. If this credit applies to you, contact your preparer to further discuss your situation.
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