The new $3,000 and $3,600 Child Tax Credit (CTC) could be a problem for divorced couples who share custody of minor children. It’s already difficult co-parenting with someone you chose to no longer share a romantic life with, but with the child tax credit, you and your ex-spouse’s finances may seem connected again. President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) earlier in the year, and the advance child tax credit payments are scheduled to begin next month. The IRS has already sent letters to eligible families in advance of their first payment. The legislation increased the child tax credit for all children under 17, with an even bigger boost for children under 6. The ARPA child tax credit increase is a temporary benefit only for 2021. Because it’s a temporary stimulus, the bill didn’t include any changes for claiming dependents or rules for single parents sharing custody.
How Dependents are Treated on Taxes for Divorced Couples
The IRS only allows a dependent to be claimed by one taxpayer, which means that divorced parents cannot each claim their minor child. Typically, divorced parents follow set rules regarding claiming dependents each year. The parent who has the larger percentage of custody claims the credit. When the parents have equal custody, the parent with the higher AGI (adjusted gross income) claims the child. Some co-parents have custom arrangements for their circumstances that alternate claim status based on odd and even years or rotating children. Taxpayers can use IRS form 8332 to make the annual dependent rotating claim easier. With the passage of the ARPA, payments will be made in advance each month until parents file their return for the next year. Parents will receive advanced payments based on their prior year’s return. What does that mean for parents who alternate years or the parent who claimed the child in the even year but will be paid a tax credit in their co-parent’s odd-numbered year? Because the IRS uses the information it has on file from the previous year’s return, it can create friction between parents who may feel they are being treated unfairly.
Child Tax Credit in Current Divorce Proceedings vs. a Finalized Divorce
If you are currently going through a divorce, you have time to discuss how to handle your taxes if you have children. The tax issues surrounding deductions and credits for dependents, like the current child tax credit, should be discussed. If couples can start early, they have time to resolve any disagreements regarding tax, custody, and connected issues through negotiation with their lawyers. If or when an agreement is reached, the judge will approve it and enter it into the court order of the case. For co-parents who have finalized their divorce, the child tax credit may be a more complicated issue to resolve as it’s not possible to negotiate it into your current divorce settlement and custody arrangement. Divorced parents would have to resolve the tax credit together and decided whether they will modify their custody order.
The Future of the Augmented Child Tax Credit
After the enhanced CTC was passed in Congress, the feeling was that the program could become a permanent feature in the tax code. If the CTC remains enhanced, it could be beneficial for many co-parents to decide how to resolve these confusing issues. These enhanced tax credits represent a potentially divisive issue if not handled clearly.
A divorce lawyer can provide critical guidance when navigating through divorce or custody proceedings. Call us today at (215) 515-9901 to schedule a consultation or use our online contact form to request more information.