The Tax Cuts and Jobs Act (TCJA) was signed into effect on December 22, 2017. For divorcing parents, parties should be aware of changes to dependency exemptions and child tax credits.
Prior to the new tax reform, the dependency exemption reduced taxable income, and parents could exclude $4,050 for each dependent. The new tax law eliminates these dependency exemptions.
A tax credit reduces tax liability, and offsets taxes owed dollar for dollar. The new law retains the child tax credit with a new definition and increases the credit from as much as $1,000 to $2,000.
To qualify for the child tax credit, the child must be related to the taxpayer, live in the taxpayer’s home more than half the year, and must not provide more than half of his or her own support. If the parents are divorced, the parties can agree as to who is permitted to claim the child as a dependent and qualifies for the child tax credit.
Again, the child tax credit is worth up to $2,000 per qualifying child for children up to age 17. The refundable portion is limited to $1,400 (adjusted for inflation). Additional changes include a lower earned income threshold at $2,500, and the beginning credit phase out increased to $200,000.
Tax reform will force divorcing parties to stake claims to the child tax credits as opposed to the now extinct dependency exemption. Ultimately, the credits are even more important where divorcing couples will have fewer dollars to pay alimony because tax consequences for alimony are different.
Changes will sunset December 31, 2025, and Congress will need to then vote to extend or let the credits expire.