The American Rescue Plan Act has provided much needed assistance to American families who are struggling. The sudden windfalls that these families will receive will have an impact on couples who are getting divorced. It may also disrupt parents’ existing child custody and child support arrangements.
Before 2021, a $2,000 dollar child tax credit was available to all who made below $400,000 for each child under the age of 17. After this, the child tax credit would start to phase out at $50 every $1,000 dollars you made over the threshold. Of this, $1,400 could be directly refunded. People claiming a refund for the child tax credit needed to have some kind of baseline income (the minimum could be as little as $2,500). All children were required to be US citizens or residents and have a social security number.
In 2021 the child tax credit will be increased to $3,000 dollars per child 17 and under, and $3,600 per child under 6. The full amount of the child tax credit can be refunded if your tax obligation is low or non-existent, and there is no longer a minimum income to qualify for a refund. The child tax credit income can be used for any purpose, even if it is not related to the child’s welfare. The child tax credit can also be refunded in advance, if a refund is requested.
Starting in July 2021 the refund will be paid in 6 installments through December 2021. This is a way that struggling families can get the money to their bank accounts as fast as possible. Unlike previously, this higher payment will not be extended to families making up to $400,000. The higher tax credit is only available to people filing jointly who make $150,000 or less, people filing separately who make $75,000, and people filing as head of the household who make $112,000. It phases out after these thresholds at $50 for every $1,000. The lower $2,000 dollar tax credit from years previously is still available to people making up to $400,000. As before, the child must be a US citizen or resident and have a social security number.
It’s easy to see how divorced parents might face conflict over an influx of “free money,” that is only available to one parent. For couples who are already divorced there is a judgment of the court that explains how these deductions are to be alternated, but even in those scenarios there can be conflict because the pandemic did not impact all parents equally and there may be a situation where one parent is in desperate need of these funds, but it was not their year to claim the children.
Parents have faced huge upheavals and sacrifices during the pandemic. Some have given up huge amounts of time to homeschool their kids. Others have lost their jobs and a sense of identity. With that has also come new questions about household income and how much money is needed to support the family. Whether parents have decided to split during the pandemic or were already divorced, the balance of income between two parents may well have changed. For couples who are divorcing there is nothing in place stating definitively which of them will claim the children in any given tax year and that can create a lot of additional conflict.
With the new child tax credit there could be resentment that one parent is getting a ‘bumper’ year, or that one parent is paying a high amount of spousal support, while the tax credit goes to the other parent. There could be a sudden, unexpected jump in child tax credit income for parents who have a child who is 17 (previously children who had actually turned 17 didn’t qualify). There could be questions over whether to optimize the net income by claiming the credit against tax, or whether to receive the advance payments to pay for urgent expenses and bills (if one parent is earning much less). Spouses could be suspicious of each other or have good cause to suspect that one spouse will spend the money on things unrelated to the children. Even if both spouses are acting in good faith, there could be questions over whether the money should be used for a college fund or, say, home renovation. Or if one spouse takes a trip with a new partner, there may be resentment that the child tax credit income is going to a parent who is spending on discretionary things.
In short, even while the child tax credit is a blessing, it’s also a potential minefield for divorcing parents. There are some hopeful indications that congress might make the higher child tax credit permanent after 2021, which means this issue is not going away and could become more important to parties in the future. Either way, optimizing the child tax credit to do the best for your children in divorce requires a lot of reflection and planning. There are also a number of other issues to consider, such as any stimulus check money parents have received or are entitled to receive for dependents and the Earned Income Tax Credit for families with dependents, which was extended as part of the American Rescue Plan Act. If your household lost income during the pandemic you or your spouse may now qualify for the Earned Income Tax Credit.
Parents getting a divorce should make sure their attorneys and tax accountants are aware of their individual and collective income and should be prepared to negotiate over the best way to use the child tax credit.