By Jaime R. Girgenti, Esq. and Frances E. Martinez, Esq., OLDER LUNDY ALVAREZ & KOCH
On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021. Part of that $1.9 trillion dollar plan is a change to the IRS child tax credit, which could have an impact on divorced parents or parents never married and co-parenting their children. If eligible families have not filed a 2020 or 2019 return yet, they should do so soon to take advantage of these payments.
The Internal Revenue Service has started sending letters to more than 36 million American families who, based on tax returns filed with the agency, may be eligible to receive monthly Child Tax Credit payments. The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600, for qualifying children under the age of 6 and to $3,000 per child, for qualifying children between ages 6 and 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17-year-olds were not considered as qualifying children for the credit.
The IRS will issue advance Child Tax Credit payments, in monthly increments, on July 15, August 13, September 15, October 15, November 15 and December 15.
The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of:
- $75,000 or less for singles,
- $112,500 or less for heads of household, and
- $150,000 or less for married couples filing a joint return and qualified widows and widowers.
The Child Tax Credit phases out in two different steps, based on your modified AGI in 2021. The first phaseout can reduce the Child Tax Credit to $2,000 per child and reduces it by $50 for each $1,000 (or fraction thereof) by which your modified AGI exceeds the income threshold described above.
The second phaseout can reduce the remaining Child Tax Credit below $2,000 per child if your modified AGI exceeds $400,000 if married and filing a joint return; or $200,000 for all other filing statuses. The second phaseout reduces the Child Tax Credit by $50 for each $1,000 by which your modified AGI exceeds the income threshold.
Most families do not need to take any action to get their payment. The IRS will calculate the payment amount based on the 2020 tax return. If that return is not available, either because it has not yet been filed or it has not yet been processed, the IRS will instead determine the payment amount using the 2019 return.
But divorced parents may want to opt-out.
Only one parent can claim the credit for each child each year. It cannot be split up. Typically, the parent who has custody of the child for most of the time should receive the credit. But in other cases, co-parents will often have a provision in their parenting plan stating that the credit shall be alternated from year to year. An alternating provision is typical in cases with 50/50 or equal and rotating custody.
So, who should get the credit in a case of equal rotating custody?
The advance credits will be based on 2020 tax returns, or the most recent year the IRS has on file. Technically, though, the parent claiming the dependents for 2021 should get the payments, which can complicate things if parents alternate claiming the child(ren) on their tax returns.
If Parent A claimed the child in 2020 but Parent B will claim the child in 2021, Parent A will still get the advance payments, which means they may want to go ahead and waive them now. If not waived, Parent A may have to repay the money paid out.
Parents can opt-out of the payments using the IRS’s online portal. Later this year, the parent who did not claim the child last year, but can claim the child this year, will be able to use the portal to update information on their qualifying children to get the advanced monthly payments, according to the IRS.
If you are divorced, and you alternate claiming your child or children with your ex-spouse, we recommend having a conversation with your ex-spouse about the credit before you find yourself in a situation where you may have to re-pay your spouse for money received.
About the Firm:
OLDER LUNDY ALVAREZ & KOCH, founded in 2003, is a full-service law firm with offices in Tampa, Clearwater, Dade City, Trinity and Wesley Chapel. OLA&K attorneys offer a fresh, and innovative, approach to the practice of law with their skills and interdisciplinary expertise, they deliver extraordinary service and results. No matter what the issue is, OLA&K attorneys will have a precise understanding of the client’s needs and will deliver customized solutions.
About the Authors:
Jaime R. Girgenti and Frances E. Martinez are family law attorneys at OLA&K. They bring their extensive expertise to complex family law matters including high conflict divorces. To contact them, please call 813.254.8998 or visit OLALAW.com
