The American Rescue Plan Act of 2021 was signed into law by President Joe Biden on March 11, 2021. Also known as the COVID-19 Stimulus Package, the $1.9 trillion legislation was intended to help speed up recovery from the recession triggered by the pandemic. The legislation includes an increase to the child tax credit for 2021, which is great for American families. However, claiming the CTC could get complicated for some divorced parents.
How did the child tax credits change for 2021?
As the IRS website explains, the child tax credit 2021 increased from the $2,000 (per qualifying child) previously allowed with the child Tax Credit 2020 to:
- $3,600 for children ages 5 and under at the end of 2021; and
- $3,000 for children ages 6 through 17 at the end of 2021.
The amount of the child tax credit may be less for some families based on parents’ adjusted gross income (AGI). According to the IRS, to qualify for the full amount the parents’ 2021 income cannot exceed:
- $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
- $112,500 if filing as head of household; or
- $75,000 if you are a single filer or are married and filing a separate return.
According to the White House, the American Rescue Plan Act only increased the CTC amount for 2021. However, the Biden administration hopes to pass legislation to make the increase effective moving forward.
What is the advance child tax credit?
To speed financial relief to families quickly, the legislation allowed the U.S. Treasury to pay 50% of the 2021 child tax credit amount in advance. Parents who filed tax returns in 2021 (for 2020 earnings) started receiving incremental monthly payments of the advance child tax credit starting in July of 2021—either by direct deposit or check. The balance of the child tax credit 2021 will be paid to parents when they file 2021 tax returns next year.
If you didn’t file taxes this year (in 2021 for 2020 earnings), say you didn’t earn enough income where you were required to file taxes, you may still be eligible to receive the advance child tax credit. The White House explains how to claim the CTC here, along with other details about the legislation.
When parents are divorced (or no longer together), who gets the CTC?
In general, the child tax credit typically goes to the parent who cares for the child most of the time during the year. If the parents’ custody arrangement is true 50/50 possession, the CTC usually goes to the parent with the highest AGI.
As we’ve seen in our Fort Worth family law practice, parents definitely do and will fight over who gets the CTC. With the new advance child tax credit some parents have tried to file first to obtain the credit; however, if the second parent files their taxes with the dependency exemption, both parents will get audited, and then it will come down to who had the child in their possession most in 2021.
The issue we’re seeing now is with the up to $300 per month that has been coming into parents’ bank accounts since July 2021 and running through December 31, 2021. Since the child tax credit 2021 is based on the previous year’s tax returns, there was an assumption on the government’s part that one parent (the one who had the child more last year or the highest AGI) would also have the child more (or higher AGI) during 2021—before 2021 completely played out.
Consequently, if you didn’t opt-out of receiving the advance child tax credit, you may have already received a portion of the dependency exemption for 2021 (with the other half going on your tax return), even if it wasn’t your turn to receive it. This could be a huge headache for parents who alternate the tax dependency exemption, or if any changes to custody or AGI occurred between 2020 and 2021.
Parents may have difficulty resolving child tax credit disputes in court—unless they think ahead
We expect to see more disagreements at the district court level regarding which parent gets to take the child tax credit 2021, especially for parents with true 50/50 custody arrangements. However, the district courts won’t address the issue because it’s tax-related, thus a federal issue. In addition, this particular tax issue is new and hasn’t been litigated before 2021, and as of this writing, there is no precedent as to how the courts will deal with it.
As an attorney representing clients in divorce, child custody and child support matters, I always believe in forward-thinking. That means if a client requests a modification to a decree or order, I will ask the court to include a remedy in the new orders to resolve certain issues at the district court level, just in case any potential disputes come up later.
In the case of the child tax credit, if the other parent has or is to erroneously receive the child tax credit 2021, I would ask the court to include a remedy in the modification order requiring any child tax credit payments be immediately diverted to my client, say within 3 days of receipt.
That way, if the other parent doesn’t comply with the order, they commit a contemptible action, which my client could bring to the district court. That action wouldn’t be for filing taxes improperly—which the district court won’t generally get involved with—but for taking money and not diverting it for the child’s benefit.
What happens if you have already received 2021 child tax credit payments in error?
If you and the other parent take the dependency exemption alternate years, and 2021 is the other parent’s year to claim the exemption, you will either need to reimburse the other parent for those payments or deal with the IRS. When the other parent files his or her 2021 taxes with the dependency exemption in 2022, the IRS will come after you to repay the funds you received in error. No one wants to deal with the IRS or a higher IRS payment of taxes, right?
You also can’t claim you weren’t aware you received those child tax credits payments or didn’t see that money come into your bank account (just like some parents do with child support). The court doesn’t view that as a defense. So, if a court orders you to hold any tax credits for your child as child support—which the court has the authority to do—you have to watch your bank accounts to ensure you comply with the court order.
If the OTHER parent received the 2021 child tax credit payments in error, your attorney can file a modification and request reimbursement of the CTC. The onus will then be on the court to decide whether to order the other parent to reimburse you or not. Since the legislation is so new, there is no consistent precedent in regard to such requests.
Who should you call with questions about the tax credit for children 2021?
If you are a divorced parent or parent in the process of getting a divorce, you should speak with both your divorce attorney and a tax advisor.* Our family court lawyers in Fort Worth Texas are here to help if you have questions about divorce, child custody, child support and modifications.
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* Content found on this website is provided for informational purposes only and should not be considered as legal, financial or tax advice. Contact an attorney, financial professional and/or tax advisor for information regarding your specific situation.