The COVID-19 relief package called the American Rescue Plan has changed how much parents may receive as their 2021 Child Tax Credit and when and how they will receive credit. If you are a divorced or separated parent, you need to know how the changes will affect you and what you can do if the IRS doesn’t apply your tax credit properly.
America Rescue Plan Changes the 2021 Child Tax Credit
The annual child tax credit is not new. Parents have been able to claim their children as dependents for years, receiving a credit on the taxes they owe to account for child-related expenses. In 2020, that amount was $2,000 per child.
In fact, the Coronavirus pandemic has increased many child expenses. In addition, kids learning from home require stable internet and computers. The shutdown’s impact on the childcare industry has also forced many parents to choose between keeping their jobs and caring for their children. That’s why the American Rescue Plan included additional relief for parents of young and school-age children. The 2021 Child Tax Credit has been increased from $2,000 per child to $3,000 per child ages 6 to 17, and $3,600 for children under 6 years old.
IRS Sends Out Direct Payments – Sometimes to the Wrong Parent
Unlike the standard rule – where parents subtract the tax credit from their income on their annual tax returns the following year — the 2021 will apply in advance. The first payments were released on July 15, 2021, and more will be coming in the months ahead.
However, this process may create problems for divorced parents or those who alternate claiming their children on their tax returns. The IRS intends to calculate and distribute half of the 2021 Child Tax Credit based on information contained in parents’ 2020 tax returns. If your Judgment of Divorce or custody agreement directs you and your co-parent to alternate who claims your child for tax purposes, the same parent may receive the credits for both 2020 and 2021.
In other cases, it makes financial sense for the non-custodial parent to claim the children’s tax credits and then share the tax return with their co-parent. Often, this happens because the custodial parent’s income is taxed at a lower rate or is low enough that they would not be eligible for the entire credit amount. But those arrangements will work against divorced parents under the 2021 Child Tax Credit for two reasons:
- The 2021 Child Tax Credit applies in full even if no tax is due, eliminating the need to accommodate a low-income custodial parent.
- The Credit phases out as a family’s income increases; if the higher earner claims the children, the family may receive less stimulus money.
When the phase-out applies depends on your filing status. For single tax filers, it begins at $75,000. For heads of household, it starts at $112,500. And for couples filing jointly, it starts at $150,000. If one co-parent earns more than that, it would be more beneficial – at least for 2021, for the lower earner to claim the children for tax purposes.
What to Do If Your Ex-Spouse Received the Child Tax Credit Instead of You
The first payments went out on July 15. However, there will be future installments paid over the rest of 2021. If you believe your ex-spouse received the money instead of you, the first thing you should do is go to the IRS Advance Child Tax Credits portal to manage your payments and update your information.
Next, talk to your co-parent. See if they received or returned the money and if they would agree to give it to you or spend it on things your child needs. If that doesn’t work, consider using the collaborative divorce process or mediation to resolve the issue quickly and cost-effectively.
At Thacker Sleight, we can help you understand how the COVID-19 relief plans affect you and your family. Our experienced family law attorneys provide our clients exclusive, highly professional service. If you need help resolving a dispute over tax refund payments, contact us at 616.888.3810 to schedule a consultation. We will be there with and for you every step of the way.