Before the Tax Reform of 2018, you were allowed to subtract a dollar amount off of your income before figuring your tax for each person listed on your return, including your dependents. This is known as the exemption amount., which was $4050.00 for the 2017 tax year. For example, if you filed married filing jointly on your 2017 return and claimed three dependent children , your total exemption amount would have been $20,250 (4050.00x5). Under the new law, there will be no exemption amount for you, a spouse or any of your dependents. This year there will be a credit given for each dependent claimed on your return. The amount of the credit will depend on the age and relationship of the dependent.
Under the revised law, there will be no longer be an exemption amount for you or your dependents, instead there will be a credit for each dependent you claim on your return.
The Child Tax Credit applies to qualifying children claimed as dependents that are under the age of 17, This has been increased from $1,000.00 per child to $2,000 per child for 2018. If you did not get the credit last year because your income was over the limit, under the new law you may qualify. The income limit has been raised to $400,000 for married filers and 200,000 for all other filers for 2018. This is the amount you can make before the credit is reduced or lost.
The Family Tax Credit will allow a $500.00 credit for other dependents claimed on your return. This includes dependent children age 17 or older, parents, and other qualifying dependents.
It is important to understand the difference between credits and deductions to realize how this will affect you. A deduction is subtracted from your income before your tax is figured, so the dollar value of a deduction depends on your tax rate. For example, the $4050.00 exemption amount that was allowed under prior law saved a person in the 15% tax bracket 608.00 dollars off of their tax liability (4050x15%=608.00) Unlike a deduction, a credit is subtracted from your tax, after it is figured, so a 500.00 credit is worth exactly 500.00, it doesn't have to multiplied by your tax rate, is dollar for dollar.
Another example, take the married couple with 3 dependents, the exemption amount was 20,250, if the tax bracket is 15%, the dollar amount saved would be $3,037 (20,250.00x15%). In addition, if two of the dependents were under 17, an additional amount of 2,000 was given in the form of a credit, for a total savings of $5037.00. Under the new law, the credit for the children under 17 is $2,000 each and the other dependent over 17 would be 500.00 , for a total savings of $4500.00.
Keep in mind there are other changes that will have an effect on your tax as well, such as the new lowered tax brackets. so even though the exemptions are not allowed, you still may come out ahead when all of the changes to the tax laws are considered. Most of our clients were expected to pay less tax under the new tax laws when estimated using 2017 income.