By Amanda Singer
In the Covid-19 relief legislation signed by President Biden on March 11th in addition to the stimulus checks that most eligible Americans have probably already received the legislation also increased the child tax credit. The 2021 child tax credit has increased to $3,600 per child under five (5) and $3,000 per old child over 5. This is up from $2,000 per child in the most recent tax changes. Additionally, parents will be eligible for the full amount, even if their tax liability is very low, which will benefit low-income families the most. Previously parents could deduct the $2,000 per child credit from their tax liability, however, if they did not pay that much in taxes then they were only eligible to receive up to $1,400 as a refundable credit. Now all parents will receive the full amount no matter what their tax liability was, with half of the value of the credit issued in advance beginning in July. The income thresholds are the same as the stimulus payments, 75,000 for singles, $112,500 for head of households, and $150,000 for married couples and they fully phase-out for unmarried taxpayers earning $240,000 or more and for married couples earning $440,000
Each dependent can only be claimed by one taxpayer (and if you both try to claim the same child, you’re inviting yourself to be audited, or more likely your return will get rejected by whichever parent is filing second) meaning only one parent can claim a child per year. Typically, the parent who has custody of the children for more time gets to claim the credit, however, if the timeshare is 50/50 or the parties agree differently, or it makes more sense for one parent to take it over another then that could be different. Especially in mediation couples often work out their own agreement, such as those who have more than one child dividing their children as dependents or for those with only one child alternative which years, they claim a dependent and the parents use IRS Form 8332 to direct who should receive the amount. We also look at the income for both parents and see if it’s a situation where one parent isn’t going to benefit from taking the dependent because their income is too high then it doesn’t make sense. With the increase in the amount of the credit though and all of it becoming fully refundable this may change some already divorced parents’ agreements.
The Advanced payments of the child tax credit could create added confusion though because it’s likely that the IRS will begin sending the benefits to the person who claims the child on their tax return in 2020 because the agency typically defaults to using the most up-to-date information on file and this could raise issues especially for parents who alternate years to claim the child tax credit since it could mean one parent essentially gets the credit two years in a row.
While the parents can’t split children for tax purposes (unless each of you takes a child if there are two for example) the relief legislation directs the IRS to develop an online portal to help administer the advanced payments and hopefully this portal will allow parents to update their tax information and specify who should receive the advanced payments sot that one parent isn’t getting the tax credit two years in a row if they alternate.
Need some help sorting who takes the 2021 child tax credit? Contact West Coast Family Mediation Center for help. Call (858) 736-2411 today for a free virtual consultation.