Question

Mr. and Mrs. Palio celebrated the birth of their third child on November 18.

1. Compute the effect of this event on their tax liability, assuming that their AGI was $99,000, and their taxable income before considering the new dependent was $84,200.
2. Compute the effect of this event on their tax liability, assuming that their AGI was $412,000, and their taxable income before considering the new dependent was $345,000.
3. Compute the effect of this event on their tax liability, assuming that their AGI was $830,000, and their taxable income before considering the new dependent was $714,000.

Assume the taxable year is 2019.

Answer 1

The new born baby will help the parents clain Child Tax credit that will directly reduce the tax payable. Accordingly, the tax liability will go down by the amount of Child Tax Credit. To be able to get this tax credit, the parents will have to claim the newborn baby as a dependent.

All calculations are for the year 2019 considered as Taxable year

1. AGI=$99,000 and Taxable Income=$84,200

The Child tax credit phases out at AGI>$400,000 for married couples who are filing the tax.

In case 1, AGI=$99,000 and accordingly the tax liability will directly come down by $2000

2. In case 2, child tax credit will start phasing out as the couple's AGI >$400,000. For every $1000 increase in AGI above $400,000, the tax credit is reduced by $50.

In this case, AGI above $400,000= $12,000

Reduction in tax credit=$50*12=$600

Accordingly, herein the couple will get a child tax credit of $1400 and their tax liability will go down by $1400

3. In this case, the couple's AGI=$830,000

One full child tax credit of $2000 is lost if the couple's income reaches $440,000 as $50 is deducted from the tax credit for every $1000 increase in AGI over and above $400,000. According,no child tax credit will be received by the couple in this case.

Hence, the tax liability will remain unaffected in this case.