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. Do you agree? 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 a lot in the last 12 months. Have you had to deal with these issues too? 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 may you ask? By adding an extra incentive to claim your children on your 2020 tax return in order to receive the new child tax credit in 2021.
Huh? Liz, taxes? Really? April 15th is passed. I’m already confused. And bored. Don’t worry, I’ll explain. And stick with me, this is important.
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. Approximately 36 million families have already received a letter indicating their eligibility. Have you gotten one?
Are you eligible for the 2021 child tax credit?
In order to be eligible for this child tax credit, you must have a qualifying child and meet certain income threshold requirements. So, what are those? For example, a single tax filer with an adjusted gross income of $75,000 or less will receive the full tax credit. The child tax 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 child tax credit will apply to a large majority of the population and possibly to you!
How much could you be receiving under the new child tax credit?
If you have children under the age of 6, you could receive a monthly child tax credit of $300. For children ages 6-17, the credit could be up to $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 when you file your 2021 taxes in 2022. However, you need to let the IRS know this before they start issuing checks. Also, the amount of the child tax credit phases out as your income goes above the income thresholds.
How does the IRS determine whether you are eligible for the child tax credit?
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 is offering a portal for non-filers to update their information and claim eligibility.
So what does this mean for a divorced or separated parent? Will they still get the child care tax credit?
With everything in the law, the answer is maybe. Sorry. As stated above, the IRS will likely look at your 2020 tax return to determine your eligibility. If you and your former spouse 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. However, it is unclear how this will affect your eligibility at this time.
This issue becomes 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 dependents 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 children.
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, as of right now, only available for 2021?
One could certainly argue that it is not fair. That one being me. However, because the IRS will look at the 2020 returns for eligibility 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. As of my last review of the IRS website, it didn’t see as if the IRS had any real guidance on how to address this issue. Just sort of a TBD. I know, great.
What is a divorced parent to do about claiming the child tax credit?
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 child support order or in some other manner.
You could also make a demand that your co-parent defer the advance payments to their 2021 filing and then perhaps you can claim the child on that return and obtain the credit at that time. This may give the IRS a chance to address and fix this issue in the future. However, as of right now, I do not think there is a way to get the advance child tax credit payments for a child that you did not claim on your 2020 return but for who you are eligible to claim in in 2021. Again, just sort of a TBD.
What if my co-parent and I don’t agree on how to deal with this child tax credit?
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 similar to the stimulus checks; however, it is always best to determine whether it is your best interest to file a petition based on this additional income alone. Remember, don’t spend thousands litigating over pennies.
What should you do next about the child tax credit?
Most importantly, check out the IRS’ website addressing the child care tax credit to see if it answers any questions unique to your situation. I believe that more guidance regarding this child tax credit for divorced parents will come to light as we move closer to July 15. I would also suggest updating your information in the IRS’ Child Tax Credit Portal if necessary.
As always make sure that you check back to the Divorce Lawyer Life for more information and I will provide updates as available! Do you have other questions about filing taxes as a divorced parent? Make sure that you don’t miss my article about the top 3 tax issues every divorced parent needs to consider.
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