Tax season is upon us! Preparing income tax returns can be confusing enough - credits, deductions, exemptions, etc. This year, for parents who share custody, there are a lot of questions about the 2021 advance Child Tax Credit payments, further complicating matters!
The Child Tax Credit is a fully refundable tax credit for families with qualifying children. In 2021, the American Rescue Plan expanded the Child Tax Credit in order to help more families during the COVID pandemic. The credit increased from $2,000 per child in 2020 to $3,600 in 2021 for each child under age of 6. Similarly, for each child aged 6 to 16, the credit increased from $2,000 to $3,000. It also provides a $3,000 credit for 17-year-olds. Under the American Rescue Plan, the IRS disbursed half of the 2021 Child Tax Credit in monthly payments during the second half of 2021.
The advance Child Tax Credit payments disbursed by the IRS from July through December of 2021 were early payments from the IRS of 50 percent of the amount of the Child Tax Credit that the IRS estimated a taxpayer may properly claim on his/her 2021 tax return during the 2022 tax filing season.
While the decision to advance the 2021 Child Tax Credit was made with the intent to help parents, the payments created a new problem for separated or divorced couples. Only one person received the advance child care credit – the parent who claimed the dependent on his/her tax return in 2020. In order to receive the remainder of the credit, the parent who received the advance payments in 2021 must also claim the dependent on his/her 2021 tax return. This creates an issue for those parents who have negotiated alternating the dependency exemptions.
For parents who are unable to resolve the issue amicably, the IRS has already considered the issue and has established a plan to resolve the misappropriation of the advance Child Tax Credit. For example:
- Parent A claims the child on his/her 2020 tax return and therefore receives the advance Child Tax Credit payments in 2021.
- However, the parents previously negotiated that Parent B is allowed to claim the child for the 2021 tax year.
- If Parent A does not claim the child in 2021, Parent A will be required to repay the advance payments to the IRS, which will be paid out to Parent B as part of his/her 2021 tax refund.
Couples that are separated or currently going through a divorce should not hesitate to negotiate a special arrangement to resolve the 2021 advance tax credit issues or for their dependency exemptions in the future. For guidance as to how to best benefit from the current tax laws in your divorce, speak with an experienced family law attorney at Williams Family Law. Contact us at 215-340-2207 or email firstname.lastname@example.org.