Advance Child Tax Credit payments started arriving in the mailboxes and bank accounts of tens of millions of families this July. But there has been understandable confusion among divorced parents about how the new credit impacts them.
In March 2021, The American Rescue Plan significantly expanded the Child Tax Credit. Though currently a temporary relief measure, the proposed legislation could extend the credit into subsequent years.
For the 2021 tax year, the amount most families will receive has increased, and the upper age limit for eligible children has risen from 16 to 17. The expanded credit is worth up to $3600 per child, compared to $2000 in 2020.
The White House announced that “All working families will get the full credit if they make up to $150,000 for a couple or $112,500 for a family with a single parent (also called Head of Household).”
Above that income threshold, this year’s additional credit (over the original $2000) scales down gradually.
Unless you opt-out, the first half of the credit is automatically paid out, July through December, in monthly installments of $300 per child under 6 years of age and $250 per child 6-17 years old. Families can then claim the remaining balance at tax time for a total credit of $3600 or $3000 per child based on age. There is no limit on the number of children that can be claimed. And importantly, the credit is fully refundable, meaning that even a family who owes no federal income tax for 2021 can receive it.
For divorced parents with shared custody, however, it’s a little more complicated. The IRS has provided some guidance for these circumstances, and it’s important to know that there are reasons to consider opting out of the advance payments.
First, a few basics:
- The credit is based on your most recent tax return, which in most cases is 2020, but may be 2019.
- Only one parent can receive credit for a child, and it cannot be split.
- The child/children must have lived with the parent who is claiming the credit for more than half of the tax year and be claimed as their dependent.
- If you are overpaid, you may need to pay it back at tax time.
Typically, in a given tax year, the parent who has custody most of the time would claim the child credit. However, a divorced couple with a 50/50 custody agreement may have other arrangements, such as alternating years as the custodial parent, which in this case could cause the same parent to receive the credit two years in a row.
The IRS determines who should receive the advance tax credit based on who claimed the child in the most recent tax return. So, if Parent A claimed the child for 2020, Parent A automatically receives the advance payments, even though it will be Parent B’s year to claim the dependents. In essence, Parent A is receiving advance payments of a credit s/he is not entitled to receive. When, at tax time, Parent B claims the children as dependents for the 2021 tax year, Parent A may have to pay back the advance payments.
So, what should you do?
If you are Parent A, in this situation, the answer depends on your income and filing status.
If your income is on the higher end of the eligibility scale (earning at least $80,000 for a single filer, $100,000 for a head of household, or $120,000 for joint filers), it’s advisable to opt-out of the advance payments. That way, you don’t spend money that you’ll only have to pay back at tax time.
However, the IRS has created a “safe harbor” for lower-income families during this difficult time. If your income is under $40,000 single / $50,000 head of household / $60,000 filing jointly, then you will not have to pay back the advance payments even if you were overpaid.
For those in the middle, the IRS has a complex calculation for how much you will have to pay back, and therefore it’s probably best to opt out now to avoid a painful surprise at tax time.
If you are Parent B in this scenario and are entitled to claim the child tax credit for 2021, you can claim the total amount irrespective of whether Parent A received the advance payments. In other words, whether or not Parent A opted out does not affect your ability to claim the dependents and credit. So even if you did not get the advance payments that technically should have come to you, you would still receive the full credit when you file your return in 2022. (According to the IRS website, you will also soon be able to update information through the Child Tax Credit page portal to adjust for dependents, marital status, and income.)
Every family handles its finances differently. There are various reasons other than just divorce—from extreme changes in income to simple personal preference—why monthly installments followed by a lump-sum balance may not be the best fit for you. If you want to opt-out of advance payments, Visit the IRS website and use their online portal.
An experienced family law attorney can help you navigate the complex financial issues surrounding your divorce. The attorneys at Schoenberg Family Law Group can help clients establish priorities, choose their battles, and secure their fair share of the community estate so that they will emerge from the divorce in the most advantageous financial position. We focus exclusively on family law, specializing in high-conflict, high-stakes cases involving professionals and spouses of high-net-worth individuals.
By Debra Schoenberg