On July 15th, the American Rescue Plan’s expanded child tax credit program will take effect. Under the expanded program, qualifying families will receive a monthly payment of up to $300 per month for each child under 6 and up to $250 per month for each child 6-17 years old. The expanded program also allows for half of the child tax credit for next year to be paid in advance to whomever claimed the dependent in 2020. For divorced parents, this expanded program raises many concerns, especially for those who alternate the tax years for which they claim their children as dependents.
Traditionally, married parents who file taxes jointly are seen as one unit according to the IRS. This means that dependents may be claimed by both parents on joint tax returns. However, for co-parents who file individual tax returns, dependents may only be claimed by one parent. Usually, child tax credits are allocated between co-parents in a divorce decree.
With the new expanded child tax credit program, families that alternate which parent claims the children will need to take steps to mitigate any improper child tax credit allocations. For example, if Father claims Child in 2020, the expanded program directs the IRS to begin sending half of the 2021 tax credit to Father, even though Mother would be claiming Child in 2021. This results in Father receiving child tax credits two years in a row.
Here are some potential solutions to this problem:
- Agreement. If parents can work out an arrangement for how the advanced child tax credit should be handled, they should do so in writing. Arrangements should be made for both the receipt of the advanced credit payments, and for any potential repayment.
- Updating information. Under the American Rescue Plan, the IRS is directed to create an online portal for the expanded tax credit program. Once the online portal is available, make sure the information in the online portal is up to date. Additionally, this portal may provide an option to designate which parent should receive the advanced tax credit this year. If so, make sure the advanced tax credit is allocated to correct receiving parent for the 2021 tax year.
- Opting Out. Under the advance tax credit program, there is an option to “opt out” of advance payments. If you choose to opt-out, the child tax credit will be applied when the claiming co-parent files his or her 2021 taxes. Although neither parent will receive any of the “advances,” this may prevent any issues involving repayment of child tax credits sent to the wrong parent, or repayments to the IRS due to changed financial circumstances.
If resolving tax issues after your divorce with your co-parent has become problematic, then it is important that you consult with your tax advisor and your attorney. Koenig|Dunne is aware of the many tax issues that you will face during your divorce and is here to help you navigate these issues successfully.