Question about the new (2018) Child Tax Credit and the refundable portion.?

Question

I know that for tax year 2018 the child tax credit increases to $2000 per child with up to $1400 of the credit refundable.

So someone with a high tax liability gets $2000 reduced from their liability. Someone who already has no tax liability would get $1400 added to their refund.

But what about people in between. For example lets say a person has a tax liability of $800 before applying the child tax credit. The CTC would reduce their tax liability to $0. But would their refundable portion be $600 or $1200?

I can see either one being correct, depending how the rule is interpreted.

Interpretation #1 says that since the person is getting refundable credit the value is $1400, they get $800 toward their tax liability, leaving $600 refundable.

Interpretation #2 says that the credit is worth $2000 as long as no more than $1400 is used as refundable, so the first $800 pays the tax liability and the full $1200 worth of unused credit is refundable since the refundable portion is below the $1400 cap.

I originally assumed that #1 would be correct, but when I ran a hypothetical tax scenario on the online calculator for turbo tax (and verified on another software's calculator), it appears to be using interpretation #2.

If possible, I'm curious to see reference to actual IRS website or quotes directly from the new tax law to justify which interpretation is correct.

Thanks in advance.

Anonymous · Accepted Answer

I couldn't find either info on the IRS site or the actual text of the bill, but I trust the Forbes article I found.  (Motley Fool has an error in their article.)

Using your hypothetical, where a couple owes $800 in actual tax and the earned income was $32,000, one child age 16 or under.
$2000 child tax credit available.  Uses $800 on tax.  That leaves $1200.

Income of ($32,000 minus $2500) times 15% = $4425, so the entire $1200 is refundable.

B) Same income of $32,000, but 24,000 of it is unemployment compensation and only $8000 is earned.
Tax bill still $800, reduced to $0 by credit and $1200 left over.

Formula changes to ($8000-2500)*.15=$825, so they only get $825 refundable.

C) Same income, three children.  $6000 available.  $800 to tax bill and $5200 left over.
If all earned income ($32,000 - 2500) * .15= $4425, gets $4425 refundable.
If unemployment ($8000 - 2500) * .15= $825.

Apparently all of the calculations will be on the same form (which is why the form 8812, Additional Child Tax credit is going away).  The form (or another one) will require you to list each dependent being claimed and their SSN.

Anyone who fakes their income to get more money will be banned from claiming the credit once they are caught.  Previously this was only done with EIC.

Slickterp · Answer

It would be 1200.  UP TO 1400 is refundable.

tro · Answer

the chilr tax credit is not refundable, it reduces the amount of your actual income tax due, however, if it is not entirely used up to reduce your ncome tax, it is refunded as an additional child credit after EIC is caluclated

Judy · Answer

1200 would be refunded if it works like all other refundable credits.  Final rules are not yet announced.

Question about the new (2018) Child Tax Credit and the refundable portion.?

4 Answers