Let’s face it….2020 and 2021 were challenging years for parents whether you were divorced or not. The 2021 child tax credit passed by congress and signed into law by President Biden helped a lot, but for those who share custody of a dependent it might actually have made things more complicated. Here’s what you need to know.
The advanced child tax credit represented a financial boost by expanding the existing $2,000 per child credit to $3,600 for children age 5 and younger and $3,000 for those between 6 and 17. At the same time, it created a potential headache for divorced and separated parents for whom custody of a child has shifted from one household to another – or who alternate the years that they claim their child as a dependent. That’s because when the IRS determined who was qualified to receive the credit and how the monthly installments should be disbursed, they made their decision based on who claimed the dependents on the most recent return on file – generally either 2020 or 2019. If you have received that payment and are not entitled to it because your child is living with your ex or it isn’t your agreed-upon year to claim your child as a dependent, you could end up owing the IRS for money that you received. The good news is that there is a relatively simple fix available. By logging into the Child Tax Credit Update Portal, you can simply unenroll from the monthly advance payments. Doing this will allow you greater control of how and when you get the credit, if at all.
There are a few things that you need to keep in mind. First, if you and your spouse have been alternating years of claiming your child as a dependent, there is a good chance that you both got a stimulus check from the American Rescue Plan’s first two payments. But Congress recognized that mistake pretty quickly, and by the time the advanced child credit checks for 2021 were ready to be sent out, only one parent was able to receive the payments – the parent who claimed the child on their 2020 tax return. If you are not claiming your child as a dependent in 2021 and you’ve been receiving checks because you claimed them in 2020, then you could end up owing as much as $3,600 back. The IRS recommends that parents in this situation stop the payments from coming by unenrolling via the portal. You can then claim the credits on your tax return when it is your turn again in 2022.
The simplest approach to this scenario is for both parents to unenroll and forego the monthly payments in lieu of the credit. This would avoid confusion and keep both parents from having to worry about owing money back to the IRS. However, if your ex doesn’t unenroll you will still be able to claim the credit on your tax return when it is your year to claim your child as a dependent.
Another important thing to understand is that if you or your spouse are past due on child support payments, you will not be able to use the government payments as an offset or to reduce overdue taxes or debts from previous years unless you receive the funds as a refund after filing your tax return.
For more information on how the child tax credit might impact your particular custody and support arrangement, contact our Pennsylvania divorce law firm today.