“What Are the Child Tax Credit Tests?”

Many of the questions we receive revolve around the Child Tax Credit, as it is one of the most popular and common tax credits. In addition, it can add to quite a sizable reduction in tax liability, especially for families with more children. 

Mark writes to us: “Hi Mike, first time writing in but love all the advice as well as the technical knowledge you provide here. 

I have three kids and this year I’m planning on handling my own taxes as I am unhappy with my tax preparer. I was hoping you could go over the rules for the Child Tax Credit, as I have already determined they are my dependents using the tests you have shown previously.”

That’s a great question, Mark, and something we’ve been meaning to tackle. 

First, the income requirements for the Child Tax Credit for a single person is $200,000 gross income (MAGI for those tax professionals out there) or under ($400,000 for married filing jointly).

The credit phases out $50 for every $1,000 of gross income over these limits.

Also notable, your income must be over $2,500 to claim the Child Tax Credit.

If you meet the income requirements, you’re well on your way to receiving the Child Tax Credit. However you must also meet the following tests for each child:

  1. The child must be a US citizen, national, or resident alien
  2. The child must have lived with you for over half of the tax year
  3. The child must have been under age 17 at the end of the tax year
  4. The child must not have filed a joint tax return for the tax year (unless they didn’t have a filing requirement and file anyway)
  5. The child must not have provided over half of his or her own support for the tax year
  6. The child must be claimed on your tax return 
  7. The child must be related to you in one of the following ways: your son, daughter, stepchild, foster child, sibling, step-sibling, half-sibling, or a descendant of any of the above

 


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This article should not be considered tax or legal advice. Always consult a professional for your specific situation.

“How Much is the Child Tax Credit Worth?”

Having children can be a blessing in many, many regards. And of course it can be a curse in others. Our government acknowledged the virtue of raising children and the burden it can bear on the parents.

Because of this, they enacted a credit many years ago for personal income taxes for every qualifying child a taxpayer has.

Manny writes in: “Mike, I hear there a lot of changes this year for the Child Tax Credit and I want to make sure I’m not getting screwed over by the changes. I have three kids and have always benefited from the credit and the exemptions. Any help you can give is appreciated. Thanks.”

Thank you for writing in, Manny. The Child Tax Credit is one of the more popular tax credits we write about because of how many people it affects. We’ll start with the general eligibility requirements and then talk more specifically about the phaseouts and limitations.

In order to claim the Child Tax Credit, you must have a child that qualifies as your dependent and is also under the age of 17 at the end of the tax year. 

This is important and should not be confused with the tests for a qualifying child for a dependency, which the general rule for that is under age 19, not 17.

Now for the phaseout ranges: under the new rules, the phaseout for single folk is $200,000 MAGI ($400,000 MAGI for married filing jointly). 

The credit phases out $50 for every $1,000 of MAGI over the threshold until the taxpayer is no longer able to benefit from it.

Because of the high MAGI limitations, most taxpayers are eligible for a sizable portion of the Child Tax Credit.

Now for how much you can get back under the new rules: the Child Tax Credit is worth up to a $2,000 reduction of tax liability for every qualifying child. 

If the amount of the credit reduces your tax liability below $0, you may also be able to claim a refundable credit known as the Additional Child Tax Credit.

 


To have your question featured, leave a comment below.

This article should not be considered legal or tax advice. Always consult a professional for your specific situation.

“Can I Still Deduct My Tax Preparation Fees?”

We’ve written about this topic previously, but are still going to cover it in-depth and from a different angle to better understand the concept of the itemized deductions subject to the 2% limit, as well as the specifics of how to it applies to your fees for tax preparation.

Maddie writes in: “Hi Mike, I have a question for you. My tax preparer has always raised her fee pretty substantially every year when I go to her and she always jokingly justified it by saying ‘well, at least it’s deductible.’ 

Is that even true and does it do anything good for me or is it really just helping her? Thanks!”

Thanks, Maddie. For starters, in years past, yes, your preparer has always been honest with you. It is a deduction against your other income on Schedule A of Form 1040.

This year (2019), however, if she tries to pull the same thing, she will not be being as honest.

The reason?

The Tax Cuts and Jobs Act took away your ability to deduct any of the previous items that were subject to the 2% of AGI floor. 

Unfortunately for those paying high fees (and those charging them), there is now less incentive to have someone else prepare your income taxes for a fee.

You may be wondering: “Well, my preparer tells me I have a lot of deductions every year. Which other ones are no longer deducible?”

There is a laundry list of now-non-deductible personal expenses for Schedule A.

We will only provide a small list; tax preparation fees, union dues, investment adviser fees, appraisal fees, and hobby expenses. For a longer list, click here.

The details may change in the coming years as this provision was only meant to last until 2025, at which point the old rules will apply again if the new ones are not extended.

In addition, the deductions likely to be your largest ones are still deductible, including mortgage interest and property taxes.

 


To have your question featured, leave a comment below. 

This article should not be considered tax or legal advice. Always consult a professional first.

“How Much Life Insurance Do I Really Need?”

The question usually comes up in regard to insurance planning: “How much life insurance do I really need?” This implies of course that the belief is held that either the amount recommended is incorrect or perhaps the insurance isn’t needed altogether. 

We’ll go over a specific scenario below.

Richard writes in: “I’m 36, recently married, and my wife has two kids from a prior marriage. As soon as we started to get serious, we met with a financial planner and of course one of the first things the planner wanted to talk about was insurance. He immediately recommended a $1,000,000 term policy.

I have a policy for $50,000 at work, so I should be covered, correct? Why would my beneficiaries need more than that? It should cover burial costs and give them something left over too if I am to pass.”

Richard, thanks for writing in. For starters, the planner has one advantage that I don’t: the ability to ask you questions in a more direct format. 

That being said, I will speak first more generally and then get to specifics.

In general, if a person has a need for life insurance, their policy at work is usually not enough. 

The reason being is that yes, it could be enough to cover burial costs but usually if you have a need to do that, it means that you have other dependents that will rely on more than that and were likely relying on your income. 

Now this gets into the specifics as to whether your work policy is enough or not. Your planner likely asked if your new wife and her children are dependent on your income, or if your wife is able to support herself if something happened to you.

If your wife and new children are unable to support themselves in the event of your passing, they will need income replacement likely for perpetuity, not just a few years.

This is where the idea of a large term policy (around $1,000,000) comes into play. That large of a face amount placed into an interest-bearing account should give your beneficiaries a sizable income to help replace the income they lost from your passing. 

I hope this information helped, Richard.

 


Thank you for reading and feel free to leave a comment below to have your question featured. 

This article should not be considered legal or tax advice. Always consult a professional for advice on your specific situation.

 

Can I Reimburse My Employees Tax-Free?

Do your employees use their own vehicle for work, pay for food, travel, or maybe buy office supplies out of pocket? Have you been reimbursing them without knowing the rules regarding reimbursements and the many taxes that pay is generally subject to?

It’s a common problem for employers when they’re unaware of how to reimburse employees, but would still like to, especially knowing how important it is to the employee. 

The good news is is that most reimbursements for employees are completely tax-free*. 

And we’re assuming you saw that asterisk above so you know that’s not the full story. 

*If you want to reimburse your employees tax-free, the IRS will expect you to have what is known as an accountable plan in place.

An accountable plan may sound overwhelming to implement, but in practice is quite easy. Substantiation for employee business expenses generally only requires a log of receipts and purpose of the expense. 

In addition to this, reimbursements cannot exceed certain IRS rates. For example, when an employee uses their own vehicle for a work trip, you may reimburse them for mileage tax-free up to the pre-determined IRS rate. 

This is done specifically so that employers and their accountants don’t get too creative and come up with ways to pay an excessive amount to employees tax-free.

Other rules are in place for general travel and meals, like per-diem (per day) rates. 

In addition to being free from federal income tax, these reimbursements are free from Medicare, Social Security, FUTA, SUTA, and state income taxes.

If an accountable plan is not in place, you may still reimburse your employees, but with a major catch being that the reimbursements are not tax-advantaged like under an accountable plan. 

With the Tax Cuts and Jobs Act eliminating the itemized deductions with the 2% limitation (meaning employee business expenses are no longer deductible), now is the perfect time to talk to your accountant about putting into place an accountable plan. 

Being unable to be reimbursed for out-of-pocket expenses has been known to be enough to make a good employee look elsewhere.

 


Thank you for reading. This article is meant as general guidance but should not be interpreted to constitute tax or legal advice.