Preliminary Information About The New Child Tax Credit.
June 23, 2021 • by Elizabeth J. Billies
While all of us have had to tackle unique challenges this past year, perhaps no one has had to do that more so than divorced parents. Between making decisions regarding schooling, changes to custodial schedules because of new work arrangements, or deciding whether to send their children to summer camp, divorced parents have had to attempt to work together with their former spouse. Can you relate? In addition to the custodial curveballs, recent changes to the tax law as a result of COVID-19 rescue plans have also created unique challenges for divorced parents. Those changes may affect how you and your co-parent claim your children on your taxes now and in the future. How so? By adding an extra incentive to claim your children in order to receive the new child tax credit.
Under the recently passed American Rescue Plan, Congress increased the child tax credit for certain families. Starting on July 15, 2021, families that are eligible for this additional credit shall start receiving monthly payments for this additional credit. Approximately 36 million families have already received a letter indicating their eligibility. Do you know whether you are eligible? In order to be eligible, you must meet certain income threshold requirements.
For example, a single tax filer with an adjusted gross income of $75,000 or less will receive the full tax credit. The credit begins to phase out after that and is completely extinguished at an income of $240,000. If you are someone who files head of household, your adjusted gross income must be $112,500 or below to receive the full credit, with a phase-out above that threshold. As you can see, this tax credit will apply to a large majority of the population and possibly to you. If you have children under the age of 6, you will receive a monthly credit of $300. For children ages 6-17, the credit is $250 per month. If you do not want to receive the monthly tax credit payment, you do have the option of receiving the entire lump sum to when you file your taxes in 2022.
How does the IRS determine whether you are eligible? The IRS generally will look at the most recent tax information that you have on file. Therefore, if you have already filed your 2020 return, they will look at that return. If your 2020 return is on extension, then they will likely look at your 2019 return. Non-filers are also eligible, similar to their eligibility for the previous stimulus checks. The IRS will be offering a portal for non-filers to update their information and claim eligibility. Those portals should be available on July 1.
So what does this mean for a divorced or separated parent who files separately from the other parent? First, as stated above, the IRS will likely look at your 2020 tax return to determine your eligibility. If you filed together for that return, then you will likely be subjected to the married filing jointly income threshold (because you were technically married at the end of 2020 but have since separated). If you divorced after the 2020 return was filed, you may be able to update your marital status on the IRS portal available to non-filers.
This issues become even trickier for parties who are already divorced and file their tax returns separately. Under current IRS rules, the parent who has primary custody of the children should claim them as a dependent on their tax return and thus get the child tax credit. If parties share physical custody equally, then the party with the higher adjusted gross income is eligible to claim the child.
However, oftentimes parties make alternate arrangements for claiming their children on their tax returns in either their support or final divorce agreement. For example, sometimes the parties split the exemptions if there are more than one child available to be claimed. Otherwise, if there is only one child or an odd number of children, the parties may alternate children on their tax returns. In general, the IRS will not disturb these arrangements, provided that no children are claimed on both returns.
It is this exact scenario that is making it difficult for divorced parents to appropriately receive the child tax credit. What if your co-parent claimed a child on their 2020 tax return, but you are eligible to claim them in 2021 due to your alternating arrangement? Should that parent be receiving the child tax credit for a child that you are eligible to claim in the next year, as this additional credit is only available for 2021? One could certainly argue that it is not. However, because the IRS will look at the 2020 returns and not a future filing, it remains to be seen whether this issue, which is unique to divorced or separated parents, will be rectified prior to the issuance of the first payments in July.
So, what is a divorced parent to do? While we currently wait for more guidance from the IRS about this issue, you should first determine your eligibility for this child tax credit and how much you would be receiving based on your income levels and number of children. If you believe that you are entitled to this child tax credit for 2021 and will not be receiving it because of this divorced/separated parent issue, it may be something to address in a future support order or in some other manner. If you and your co-parent are unable to agree on how to resolve this issue, I would suggest contacting a divorce attorney to discuss your options and whether it is worth pursuing these additional monies through either a support action or other means. These additional monies could be considered income available for support; however, it is always best to determine whether it is your best interest to file a petition based on this additional income alone.
I believe that more guidance regarding this child tax credit for divorced parents will come to light as we move closer to July 15. Therefore, make sure that you check back here for more information and we will provide updates as available. Do you have questions about filing taxes as a divorced parent? Do you believe you may be entitled to additional support because of child tax credits, stimulus checks, or other financial issues? Please contact one of our family law attorneys to discuss your unique situation and determine the best course of action for you and your children.