The Child Tax Credit and Dependency Exemption Under the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act made significant changes to the child tax credit and eliminated the dependency exemption.

The child tax credit has been greatly expanded by the Tax Cuts and Jobs Act, the massive tax reform law that took effect in 2018. Under prior law, the child tax credit was only $1,000 per child. Moreover, it was nonrefundable. This meant that if your credit exceeded the amount of tax you owed, your tax bill was reduced to zero but any remaining unused credit was lost. If you owed no income tax at all, you got no credit.

Starting in 2018, the child tax credit is $2,000 per child and up to $1,400 per child is refundable. This means you can get up $1,400 from the IRS even if you owe no taxes all. However, the actual refundable amount you can collect if you owe no tax for the year depends on your earned income (generally, wages, salary, tips, or net earnings from self-employment).

The IRS has an online questionnaire you can complete to determine if you qualify for the child tax credit. Visit the Is My Child a Qualifying Child for the Child Tax Credit? page at the IRS website.

Unlike the child tax credit which was expanded under the new tax law, the dependency exemption was completely eliminated. As a result, parents will not be entitled to claim the exemption during 2018 through 2025. For decades, parents have been entitled to a dependency exemption for each child they support. This exemption worked just like a tax deduction: It reduced your taxable income so you ended up paying less income tax. For 2017, the exemption amount was $4,050 per child. Under the TCJA, parents will not be entitled to claim the exemption staring in 2018 through 2025.

Typically, when parents divorced before 2018, the custodial parent got the dependency exemption for their children. Parents were not allowed to split the exemption. However, divorcing parents were free to agree to have the noncustodial parent claim the dependency exemption. This could make sense where the custodial parent had little or no income to be taxed and the noncustodial parent, who pays child support, did have income.

To give up the dependency exemption, the custodial parent had to sign IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent,or a substantially similar statement. The transfer of the dependency exemption to the noncustodial parent could be for one year or any number of future years. It was up to the parents to decide. The noncustodial attached the Form 8332 or the statement to his or her return to claim the dependency exemption.

You might think that Form 8332 has no significance during 2018 through 2025, since there is no dependency exemption for these years. However, this is not the case. This is because claiming a dependent child under age 17 on your tax return can affect whether or not you can claim the child tax credit. If you signed a Form 8332 allowing the noncustodial parent to claim the dependency exemption, you won’t be entitled to the child tax credit. Your noncustodial ex-spouse will get it. If you want the credit, you’ll need to revoke the Form 8332 release. You can use Part III of Form 8332 for this purpose. Attach a copy of the revocation to your return for each tax year you claim the child as a dependent as a result of the revocation. You must also give (or make reasonable efforts to give) written notice of the revocation to the noncustodial parent. You must also keep for your records a copy of the revocation and evidence you delivered, or tried to deliver, the notice to the noncustodial parent.

Unfortunately, the revocation will be effective no earlier than the tax year following the year in which you provide the noncustodial parent with a copy of the revocation or make a reasonable effort to do so. For example, if you revoked a Form 8332 release and provided a copy of the form to the noncustodial parent in 2018, the earliest tax year the revocation can be effective is 2019. This means you won’t qualify to receive the child tax credit until 2019.

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