- Caitlin Holland, Esq.
July is here – July usually brings us sunshine, summer vacations on the shore, fireworks and barbeques. This July, parents will be receiving advance child tax credit payments as part of the American Rescue Plan. Starting today, July 15, 2021, through December, IRS will pay half of the total credit amount due, with the other half being paid when you file your 2021 income tax return.
Eligible families can qualify for up to $300 per month for each child five (5) and under and up to $250 for children six (6) to seventeen (17). The amounts can be smaller based on income.
There are income limits, and the IRS is considering income from your 2019 or 2020 tax return, whichever is later. Your child must be under the age of eighteen (18) at the end of 2021. You will receive the payments the same way that you received stimulus checks this past year.
Eligibility has been greatly expanded for the 2021 calendar year. To receive the maximum credit, married or widowed parents must have combined income under $150,000. Parents who are not married or widowed can make up to $112,5000 if they are heads of households and $75,000 for all other individual taxpayers including single filers and married persons filing separate returns. If you do not make enough money to pay income taxes you are still eligible to receive the benefit this year, but you must input your information with the IRS. The credit is “fully refundable” this year, so families that meet the above qualifications are eligible to receive the full dollar amount, even if they do not owe income taxes.
Because of the novelty of the changes, the American Rescue Plan includes a safe harbor provision that provides individuals making less than $40,000 (or couples filing jointly making less than $60,000) will not need to repay any overpayment.
However, at this time, many of these changes are only for 2021.
This advanced tax credit is potentially problematic for divorced parents who share custody, however, the IRS has not currently issued any guidance for issues that could arise. Generally, the ability to claim your child as a dependent after divorce rests with the parent who the children reside with for a majority of the year. If parenting time is split evenly, or 50/50, the parent who makes more money granted the right to claim the child by the IRS. This is simply because the more the parent makes, the less money they will receive for the credit, thereby leaving a greater amount for the IRS to keep.
Many parents decide to make a stipulation in their property settlement agreement alternating which parent can claim the child as a dependent in a given year. When parents have multiple children, the credit is often split, with each parent claiming a certain number of the children on a given year (for example: Wife claims two daughters and Husband claims one son in odd years, Wife claims one son and Husband claims two daughters in odd years). Those parents typically fill out IRS Form 8332 in order to direct which parent should receive the amount in a given year.
Because this benefit is, so far, only for the 2021 calendar year, it can cause some problems for divorced parents who share custody. Recently, President Joe Biden introduced the American Families Plan which would potentially keep the expanded child tax credit in place through 2025.
1. Make an agreement regarding payments – Because the expanded eligibility is, so far, for this year alone, the benefits of receiving the advanced tax credit this year is particularly attractive. At this point, it appears that the IRS will provide the advanced payments to the parent who claimed the child as a dependent in 2020 (if you did not file taxes for 2020 yet, the IRS will use 2019 taxes). This could potentially be in conflict with the parent’s agreement as to who should file the child tax credit for 2021.
If you anticipate the advanced credits will cause a rift between you and your child’s other parent, it would be beneficial to make an agreement regarding the tax credit in writing. For example, the parties can agree that the parent making with a lower annual income claim the dependency so that the parties can, perhaps, split a portion of the maximum amount.
Remember that only one parent may claim a single child each year. If both parents attempt to claim the same child/children as dependents, they may be required to repay all or a portion of the monies received. This is a departure from the guidance surrounding stimulus checks which allowed both parents to claim the same child/children to receive the maximum benefit.
2. Opt out of advance payments – If the parties cannot come to an agreement at this time and may benefit from some extra time to come to an agreement or ask for guidance from the Court via motion practice, you may opt out of the option of receiving monthly checks on the IRS website. if parents choose to opt out of prepaid monthly payments, they will receive a full tax credit in 2022 when filing their 2021 tax return. It’s currently too late to opt out of the initial July 15th payment.
Here are the cutoffs for the next payments:
• Aug. 2 for the Aug. 15 payment
• Aug. 30 for the Sept. 15 payment
• Oct. 4 for the Oct,. 15 payment
• Nov. 1 for the Nov. 15 payment
• Nov. 29 for the Dec. 15 payment
At the end of the day, the child tax credit can amount to a large chunk of change, but it is not worth a drawn out fight in court where the parties will deplete the entire amount through counsel fees alone. It’s best to come to some kind of an agreement. If you need help coming up with a creative solution to the issues arising from the American Rescue Plan’s Advanced Child Tax Credits, visit HunnellLaw.com/contact to request an appointment with an attorney.
Stephanie Hunnell, Esq. , Ryan Westerman, Esq. and Caitlin Holland, Esq.