On July 15, 2021, you may have noticed some extra money in your bank account and wondered why. If you have a child, this payment was likely the first of a series of monthly IRS payments that will be paid from July 2021 through December 2021. These payments are part of the American Rescue Plan Act (ARPA). This is excellent news for families struggling with the effects of COVID-19. Let’s dive into the intricacies of these payments, as well as how they relate to divorced or separated parents.
Advance Child Tax Credit Payments for Divorced Parents
A general rundown
The Child Tax Credit has been around for decades. It is a credit that you can claim on your taxes if you meet the eligibility requirements. In 2020, many eligible families received a credit of up to $2,000 per child on their 2020 tax return. For the upcoming tax filing year of 2021, the ARPA increased the Child Tax Credit for many families. For children under 6 years old, it has been increased to up to $3,600 per child and for children between 6 and 16 years old, it has been increased to up to $3,000 per child. Normally, eligible families don’t see the benefits of the Child Tax Credit until they file their tax returns.
Not only did the ARPA increase the Child Tax Credit for tax filing year 2021 only, but it also is advancing 50% of the payments so you start to see the benefit beginning in July 2021, instead of when you file your taxes. For example, if you have a child under 6 years old and qualify for the full Child Tax Credit, you would receive a tax benefit of $1,800 when you file your 2021 taxes and six payments of $300 per month from July 2021 through December 2021 to equal the $3,600 total Child Tax Credit for eligible children under 6 years of age.
This is great news for eligible families. The money can benefit you now instead of having to wait until tax time.
On the other hand, these payments are only an advance. Thus, if you end up being ineligible for these monthly payments, you may have to pay back the advance at tax time! This can create additional headaches for divorced parents or parents who otherwise don’t get to claim their children every year on taxes.
What will it look like for divorced couples?
Many divorced couples, and other parents who don’t get to claim their children each year on taxes, are raising their hands with questions. One of the most common questions is how does the advance affect us if we alternate who gets to claim a child on taxes? As of August 2021, we still have some unknowns as to exactly how the IRS is going to handle these situations. Some of the information we do know is illustrated below.
Example: Parent A claimed the child for 2020 taxes and automatically starts to receive the advance of the Child Tax Credit in July 2021. The court order regarding the child states that Parent B, not Parent A, will get to claim the child on taxes in 2021. Will Parent A have to pay back the advance?
The answer is often yes. Unlike the first two stimulus payments, where many parents who alternated claiming the child both got the stimulus payment, the IRS has stated that they do not intend to allow the child to be claimed by more than one person for the 2021 Child Tax Credit. Thus, if Parent A receives the advance, but Parent B claims the child on 2021 taxes, Parent A will need to pay back the advance to the IRS when Parent A files taxes.
There may be an exception to this.
The ARPA also includes provisions that won’t require a parent who received an advance in error from having to pay back the advance in certain situations. If the parent meets certain requirements, including being of a lower income, the person won’t be required to pay back the advance, or at least a portion of the advance, even if it turns out that they weren’t entitled to receive the advance in the first place. It isn’t clear how this will affect the parent who had the rightful claim.
Thus, in our example above, if Parent A isn’t required to pay back the advance, it isn’t clear if Parent B will still be able to make the full claim when claiming the child on taxes in 2021 or not.
What to do?
Your first step should be to talk to your tax professional. The information here is just general information and not tax advice. Many situations are unique and it may be in your best interest to opt-out of the advance payments entirely. You should also talk with the other parent now to see if you can reach an agreement as to who gets to claim the child for 2021 taxes. You would want to cooperate with each other in filling out tax Form 8332 when 2021 taxes are filed.
There may be some tax planning strategy here for parents to consider. A parent that makes too much money to receive the full Child Tax Credit may reach an agreement for the lower-income parent to claim for 2021 and thus receive the full credit from the IRS. Further, if a parent has child support arrears, the advance payments are not being garnished for the back child support. However, the portion of the Credit that would be paid as part of a refund at a tax-filing time is likely going to be subject to tax intercept and applied towards child support arrears. These may be some of the things parents consider when deciding who should get to claim the child for 2021.
It’s important to note that these payments are not taxable. Instead, they are credits to reduce the tax bill that is being paid as an advance now. Families have the choice to opt-out of the advance and receive any available credit when filing 2021 taxes. Opting out of receiving the advance eliminates the potential for headache for parents who are concerned they may not be eligible to claim the child on 2021 taxes.
The answer to exactly how the Child Tax Credit in 2021 is going to affect every family and every situation is still unable to be answered fully (this especially goes for divorced couples). For more complete and updated information, see the IRS’s website. For general information and examples in plain language in both English and Spanish, see whitehouse.gov/child-tax-credit.
Additional Reading: Advance Child Tax Credit Payments in 2021
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