There are several provisions of the new tax reform bill that may reduce the tax obligation of those who qualify for them. The changes to the Child Tax Credit (CTC) and a new Dependent Tax Credit are two such provisions, specific to freelancers who have children or other dependents whom they support financially.

How the CTC works—As part of the American Taxpayer Relief Act (ATRA) in 2012, the Child Tax Credit, which reduced parents’ tax burden, was made permanent. Under the new tax law this tax credit has increased from $1,000 to $2,000 per qualifying child depending on a parent’s taxable income.

You may qualify for the CTC under tax reform, even if you didn’t before—Another important bit of good news related to the Child Tax Credit: tax reform increased the income threshold for phase out of the credit to $400,000 for couples and $200,000 for singles. This is a big increase when compared with the 2017 tax year amounts of $110,000 for couples and $75,000 for singles. As such, even if you didn’t qualify for the Child Tax Credit in prior years because your income was too high, you may now find that you do.

Since this is a tax credit rather than a tax deduction, the Child Tax Credit reduces your tax liability dollar for dollar with the amount of the allowable credit. This is in contrast to a deduction which simply reduces your taxable income. However, the credit still cannot be taken for more than the amount of tax you owe to the IRS.

The Additional Child Tax Credit has also increased—If you are not able to use the full Child Tax Credit because it is more than the tax you owe, you may be able to use the Additional Child Tax Credit. In this case, you may be eligible to claim this credit, allowing you to receive a payment (i.e. a tax refund) for the unused portion of your Child Tax Credit. Under the new law, the Additional Child Tax Credit increased from $1,000 to $1,400. However, if you are able to claim the full amount of the Child Tax Credit, you will not be eligible to claim this credit as well.

How do you know if you qualify for the CTC? In addition to having dependents, the IRS provides the following tests to see if you are eligible for the Child Tax Credit:

  1. Age test—The child being claimed must have been under the age of 17 at the end of 2018.
  2. Relationship test—The child being claimed must also be your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. A child can also be a descendant of any of these persons. For example, your grandchild, niece, or nephew will qualify. An adopted child includes a child lawfully placed with you for legal adoption.
  3. Support test—The child must not have provided more than 50 percent of his or her own support for 2018.
  4. Dependent test—The child must be claimed as a dependent on your 2018 federal income tax return.
  5. Joint return test—A married taxpayer can’t file a joint return with his or her spouse if the couple is filing jointly only to claim a tax refund.
  6. Citizenship test—The child being claimed must be a U.S. citizen, U.S. national, or U.S. resident alien.
  7. Residence test—In general, the child being claimed must have lived with you for more than half of 2018 to be claimed. However, a child is considered to have lived with you for more than half of 2018 if the child was born or died in 2018 and your home was this child’s home for more than half of the time he or she was alive.

If you qualify to claim the Child Tax Credit, you will need to file IRS Form 8812 with your income tax return. For questions in regard to New York State taxes and New York City tax filing help, please contact our lower Manhattan CPA office.