Married couples with children face a number of tax issues that must be resolved if the parents decide to end the marriage. One important question is which parent claims the child tax credit (CTC) after divorce, since only one parent can take the credit. The issue is especially important now, since the amount of the credit increases substantially for 2021. Currently, the increase is only for this year, but proposed legislative changes may extend the increase into subsequent years as well.
CHILD TAX CREDIT FOR 2021
Recent legislative changes in the child tax credit present potential issues for parents who are going through a divorce or have already finalized a divorce. The changes substantially increase the amount of the credit for 2021 and also provide for advance payments of the credit from the IRS, beginning in July. To qualify for the credit, a child must be eligible to be claimed as a dependent under the tax law and meet other specific criteria. If a child doesn’t meet the requirements, they may be eligible for a different credit, called the other dependent child credit (ODC).
The child tax credit amount for 2020 was $2,000. For 2021, the American Rescue Plan increased the maximum child tax credit from $2,000 to $3,000 for each child aged 6 to 17, and $3,600 for each child under age 6. The original $2,000 credit is phased out for single filers with income over $200,000 and over $400,000 for joint filers. The increased credit amount (either $1,000 or $1,600) is subject to a lower income level of $75,000 for single and separate filers, $112,500 for head of household filers, and $150,000 for joint filers.
The credit is fully refundable, even if the claiming parent has little to no tax liability. Parents now receive the CTC regardless of their employment status, which is another change. The new law does not change other rules for claiming children as dependents.
In addition to the increase in amount, a significant change for 2021 is that a parent can receive payment of half of the credit in advance by asking the IRS to send monthly payments from July through December 2021. The payments could amount to a monthly tax credit of $300 for each child under age 6 and $250 for each child of age 6 to 17. While these significant changes currently are effective only for 2021, the strengthened credit may be extended for subsequent years by additional legislation. Especially in view of these changes in the child tax credit, it is essential for parents who are ending their marriage to specifically address which parent will take the CTC following the divorce. The child tax credit poses significant factual and legal issues for divorced parents. Parents should not draw conclusions about how the credit affects them based on the broad summary provided herein. Consultation with a lawyer is essential in determining how the CTC applies in a specific situation.
RESOLVING THE CHILD TAX CREDIT IN A DIVORCE
When a married couple gets a divorce, among the issues that need to be resolved are those relating to taxes. If the couple has children, some of the tax issues involve deductions and credits relating to the children — including the child tax credit.
In some cases, parents are able to resolve tax issues during a divorce or custody proceeding through discussions between their lawyers. If the parties reach an agreement, it is presented to the court. If the judge approves the agreement, it becomes part of the court order in the case. In situations where parents are not able to resolve issues themselves, the judge makes specific determinations as part of the proceeding. Those judicial findings are then integrated into the final court order.
Since only one parent can take the child tax credit, the CTC poses a significant tax issue that needs to be addressed as part of a divorce or custody agreement or court proceeding. Generally, the parent who has custody of a child for a greater percentage of time is entitled to claim the CTC. If the custody terms provide for evenly shared time between the parents, then the parent with the higher adjusted gross income usually gets to claim it.
However, in some situations, the parents may negotiate their own arrangements to fit their specific circumstances. For example, parents may agree to alternate years for claiming the credit or to divide the credits if they have more than one child.
The child tax credit must be viewed in the context of other matters relating to the child, such as the custody arrangements. Determining issues relating to the CTC also involves application of complex statutory requirements. Assistance from an experienced divorce lawyer is critical in navigating through these types of issues in a divorce or custody proceeding
CHILD TAX CREDIT ISSUES IN A FINALIZED DIVORCE
For parents whose divorce is already final, the changes in the child tax credit may raise issues that are not addressed in the final divorce or custody order. In that case, the divorced parents may be able to resolve the issues themselves and agree on how to handle the CTC. If that is not possible, the parents should involve their lawyers in resolving the issue.
In many cases, legal counsel for the parents can arrive at a mutually agreeable approach and avoid the necessity of asking a judge for a resolution. Especially because of the advance CTC credit payments that are available this year, it’s in the best interest of the parents and their children to find an expeditious solution if problems over the recent CTC changes arise. It also seems likely that additional legislative changes are on the horizon for the credit, so addressing the matter now could avoid more issues in the future.
SCHEDULE A CONSULTATION WITH A PENNSYLVANIA DIVORCE LAWYER
At The Mulligan Law Firm, our divorce and family law attorneys assist clients with all matters relating to divorce support and child custody, including issues relating to the child tax credit and other tax issues that arise during or after a divorce. We invite you to contact us by calling (570) 703-0269 or using our online contact form.