The American Rescue Plan Act of 2021 provides financial relief to struggling families, but may be problematic for divorced couples and unmarried parents.
How Claiming the Child Tax Credit Generally Works for Divorced or Unmarried Parents
The IRS Rules relating to the earned income tax credit for divorced parents state that the parent who has the child for more than 50% of the time is entitled to claim the credit. If parents have 50/50 custody, then the parent with the higher adjusted gross income takes the credit. However, parents can agree to share or alternate who claims the credit. Parents with two children (or any even number of children) may each claim one child, thus sharing the tax credit. Parents with one child (or any odd number of children) may alternate years. Regardless of how the child tax credits are shared, the credit has always been taken when the parents file their taxes. Until now…
How Claiming the Child Tax Credit Will Work for Divorced or Unmarried Parents in 2021
First, the amount of the tax credit per child has been increased to $3,600 per child under six years old and $3,000 per child ages six to seventeen. This applies to parents filing jointly earning $150,000 per year or less, or parents who are married filing separately earning $75,000 or less, or parents who file head of household earning $112,500 or less.
Second, the child tax credit is fully refundable which means that a parent can receive it regardless of employment status and even if the parent has no tax liability. There is no minimum income required to qualify for this tax credit.
Third, parents can request that up to half of the annual child tax credit be disbursed in monthly installments beginning in July, and claim the balance of the credit on their 2021 tax returns.
Currently, this change only applies to tax year 2021. It remains to be seen if there will be legislation extending this arrangement.
The IRS will be opening online portals for parents to update their information. They will also be able to opt out of receiving the monthly child tax credit payments (and receive the entire tax credit when they file their 2021 tax return). It is expected the portals will be available on or around July 1, 2021.
In any tax year, but especially in 2021, parents getting a divorce should make sure their attorneys and tax accountants are aware of their individual and collective income and should be prepared to negotiate over the best way to use the child tax credit.
For more information generally about the Child Tax Credit and the 2021 changes, see https://www.nerdwallet.com/article/taxes/qualify-child-child-care-tax-credit or https://www.kiplinger.com/taxes/602431/child-tax-credit-2021-who-gets-3600-will-i-get-monthly-payments-and-other-faqs.
This is a basic overview of the 2021 Child Tax Credit in Divorce. The divorce and family law attorneys of Shemtob Draganosky Taylor, PC can guide you through all of your divorce and family law matters, including child support issues. Contact our family lawyers for a confidential discussion.
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