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New $3,000 Child Tax Credit Is Tricky For Divorced Parents

by
Gordon W. McNamee
on
4/14/2021
New $3,000 Child Tax Credit Is Tricky For Divorced Parents

Divorce is never easy, and the most adversarial aspect of the process often revolves around issues of custody and child support. The two often come together in a particularly challenging way around the issue of tax deductions and credits, and the newly passed $1.9 trillion American Rescue Plan is about to make things even more difficult.

There is a groundbreaking new child tax credit included in the American Rescue Plan Act (ARPA) that President Biden signed into law last month. Though it makes no changes to rules about dependency, the law boosts the existing credit to $3,600 per year for kids under the age of six during tax year 2021, and to $3,000 for those aged 6 to 17. Not only does the bill increase the credit, it also instructs the IRS to provide parents with up to half of the amount of the credit intermittently through the year. Monthly payments could start going out as early as July of 2021, although the Treasury has indicated it may have difficulty meeting that schedule. The increase is predicted to make a real change for parents and to lift many American children out of poverty, but it is also likely to create confusion (and the potential for conflict) between divorced parents.

The Child Tax Credit and Divorced Parents

The child tax credit can only be claimed by one taxpayer, and though this is not a problem for couples who are married and file jointly, this has long been a sore subject for parents who split custody of their children.  There are a variety of ways to approach and solve the issue. The most common is to provide the credit to the parent who spends more time with the child, as they are the one who is likely to be spending more money to support and care for them. But today’s custody agreements often establish a 50/50 split between the two parents. Where there is joint custody and a child’s dependency is in dispute and the parents cannot agree who claims the child, the IRS will base it on where the child slept the greater number of nights during the tax year.  

Many parents negotiate arrangements suited to their particular situation, with some agreeing that each will take the child tax credit in an alternating year or dividing dependency claims for multiple children between the two of them. The IRS has even created a form – Form 8332 – for this specific purpose

Payments Rather Than Credits Changes the Dynamic

While the question of who is entitled to a tax credit has always proven to be a hot-button issue, the ARPA’s introduction of intermittent cash payments is likely to create even more tension between divorced parents. Though the details are still being worked out, experts like Garrett Watson, a senior policy analyst for the Tax Foundation, are anticipating that the IRS will send those payments to whichever parent claimed their child as a dependent in tax year 2020, as that is the most current information that they have available. That could create significant conflict for those who had previously agreed to alternate tax years, as it could lead to one parent getting two years’ worth of credits and the other getting none. 

Though the easiest solution would probably be for the government to create a way for parents to split tax dependency of their children, that is not the case. The existing rules regarding only one parent being able to claim a child remain. The good news is that an online portal has been created as part of the relief legislation specifically to assist with the administration of the advanced payments, so parents can enter updated information and provide the agency with instructions as to who should get the tax credit or advance payments. In the best case, this will avoid one parent receiving two years of tax credits. Of course, not all former spouses will be so accommodating, and many people will not be aware of the platform’s availability. There is no doubt that there will be mistakes, overpayments, and arguments about the distribution, and the many unknowns will only make the situation worse.

The good news is that the legislators anticipated these problems and built in a safe harbor provision for those who receive overpayments and who make less than $40,000 (and for couples filing jointly who make less than $60,000). If those who fall into these categories receive credits that represent overpayments, they will not be required to pay it back and need not fear wage garnishment. For those making more than those threshold levels, those protections are unlikely to apply, so it makes sense for upper income parents to come to some kind of agreement and make sure that the government has the correct information on file – otherwise they are likely to have to pay improperly applied credits or advance payments back come tax time.

The IRS is working on updating guidance and there is hope that many of the open questions will be answered shortly. In the meantime, parents who have questions as to what to do are advised to consult their tax professional.

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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