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IRS offers guidance on new head-of-household credits

The passage of the 2017 Tax Cuts and Jobs Act (TCJA) brought many changes to the way that most Americans handle their income taxes. Most of the changes for middle-class earners comes with the loss of personal exemptions and an increase in the standard deduction. There are also new tax brackets, which may allow some people to pay less even while maintaining their same salary.

Two key changes as a result of the TCJA deal with head-of-household and child tax credits. The IRS recently offered guidance (in the form of Notice 2018-70 “Qualifying Relative and Exemption Amount”) to make it easier for the average person to understand when he or she would be eligible for credits for dependents and “qualifying relatives.”

To make up for the loss of personal exemptions, the TCJA expanded the criteria for child tax credits. These are now available for married couples filing jointly with a combined income of less than $400,000 and for individual filers with an income up to $200,000. Even filers with incomes above those might still qualify for some level of credit, but the credits reduce with income above those thresholds.

To help families whose children have aged out of the traditional child tax credit – but are still considered dependents for tax purposes (and practical purposes) – the TCJA offers a form of compromise. The Act expands the definition of a “qualifying relative” for purposes of seeking a tax credit that lowers overall taxable income. The “Credit for Other Dependents,” sometimes called a “family credit,” is a non-refundable $500 credit. It ensures that dependents who no longer qualify as children don’t end up causing a family to lose out on valuable credits or pay more.

While some explanation came in the above-mentioned notice, the IRS must still draft and codify regulations that delineate who’s eligible for the family credits and clear up inconsistencies between the language of the TCJA and the preexisting IRS code. More will come on that later; hopefully before tax season for fiscal year 2018.

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