The American Rescue Plan and Child Tax Credit Updates
The American Rescue Plan Act sent direct stimulus payments in the amount of $1,400 to Americans with a single adjusted gross income of $75,000 or less, and married couples with adjusted gross income of $150,000 or less, as well as their dependents. It also increased funding for COVID-19 relief and expanded the special enrollment period for healthcare. In addition to direct stimulus payments and an extension on unemployment benefits, the Act also increases child tax credits for families with children. Depending on the age and number of children a family has, they could expect to gain at least $600 extra a month for six months, starting in July 2021 from the IRS. How will the new tax credit affect divorced parents?
New Child Tax Credit Updates
The new child tax credit increases from $2,000 per child dependent to $3,600 per child under 5, for this year only. It increases to $3,000 for children ages 6 to 17. Even if you have already received your tax refund for 2020 taxes, if you have child dependents, you should expect to see an additional $600 monthly payment per child, starting in July of 2021. The payments, via direct deposit or paper check, will occur monthly through December 2021, amounting to $1,800 or $1,500, depending on the child’s age. Then, when parents file 2021 taxes in 2022, they will receive an additional $1,800 (or $1,500) lump sum child tax credit. The IRS states that parents can opt out of monthly payments and elect for one lump sum payment in July. To select this option, parents must notify the IRS in advance using a user portal that the IRS expects to be complete before July 2021. Payments are reduced or eliminated for married couples making more than $150,000 per year in adjusted gross income (AGI), and parents filing as head of household or single with an AGI of more than $75,000 per year.
Tax Implications on Divorced Families and Co-Parents
Divorcing couples should have completed a Parenting Agreement or incorporated parenting provisions into a Marital Settlement Agreement. These documents should contain provisions regarding tax implications, and which parent claims the child as a dependent each year. If both parents share legal and physical custody (50/50 overnights), they are both entitled to claim the child as a dependent on state and federal taxes. This means if the parents share one child, one parent might claim the child on odd years, and the other on even years. If parents share two children, they might agree that one parent claims one child every year, and the other parent claims the other child every year. More children on a return requires a strategy to determine what child is claimed by which parent each year. This should be discussed before either parent files their taxes.
These provisions are only applicable to co-parents who share physical custody including overnight custody with their children during the previous calendar year. If one parent has visitation twice a month, they do not qualify for a child tax credit and cannot claim the child as a dependent, even if they pay child support. If a previously divorced party has recently sought a modification to custody or support, this might impact future tax implications. However, the IRS will look back on the previous calendar year (2020) to make determinations for the new increased child tax credit. Also remember that the child tax credit increase is only for the year 2021, it has not been extended for future years. If you have a child on the way or were divorced in the last few months, you can also update your filing status on the portal the IRS hopes to make accessible to filers by July.
Call Our Morristown Family Law Attorneys at Eveland & Foster, LLC Today
If your ex has wrongfully claimed your shared children as dependents on their taxes, demands their “share” of your economic stimulus payments, or is threatening additional actions against you, you need legal counsel. While there are economic and criminal repercussions for defrauding the IRS and the New Jersey Comptroller, a direct impact is felt on children of divorce and the primary caretaker. If you have primary custody of your children, your ex-spouse should not be claiming them to receive the additional child tax credit and is likely in direct violation of a court order. Our attorneys at Eveland and Foster possess decades of combined experience handling all sorts of family law cases, including post-divorce modification issues and drafting of parental agreements. We also understand the interwoven nature of tax issues in family law cases. We will fight for what is fair and equitable for you and your children. Call today to schedule a consultation.