What Do Divorced Parents Need to Know?
Co-written by Carrie Quick and David DuFault
As tax time and deadlines are now approaching, recent changes to the tax code and the new government stimulus package are bringing up a lot of questions for parents that do not file taxes together, or that have had a life change such as divorce since filing their 2019 tax returns.
Early this year, child tax credit laws changed and the amount of child tax credits (CTC) temporarily increased. Previously, child tax credits were a standard $2,000 per child credit on tax returns, but the change now places child tax credits into two separate categories: $3,600 per child for children under 6 years of age, and $3,000 per child for children 6-17 years of age. For many, the adjustments to the CTC may come as a relief. Especially since COVID-19 has led to massive global changes, specifically changes in the work force and employment in the United States. CTCs are always the same amount per child and are not based upon the amount of income of either parent, or any other deductions or expenses during the year, although there are phase-outs for high income earners.
Another additional benefit of the new CTC is that for 2021 the credit is fully refundable. Prior to this year, only a portion of the CTC ($1,400 of the $2,000 credit) was refundable. The new CTC will make the entire credit refundable – partially when the 2021 tax return is filed (in 2022) and partially through monthly payments between July and December of this year. How these partial payments during the second half of 2021 will be calculated and disbursed is still being determined by the IRS. Though not part of the CTC changes, parents and other filers can still take a credit of $500 for dependents (children older than 17, college students, and others whose primary support comes from the filer).
Further, outside of the basic CTC, the stimulus packages from the federal government also extend financial relief to dependents of any age. For instance, in the latest stimulus bill package the federal government allotted $1400 per child or dependent in addition to the CTC. The stimulus payments have been paid in three (3) different packages since March 2019. Stimulus payments are/were based upon tax returns filed in 2019.
Both of these changes were made with the intent to help parents – but for co-parents living in two-households, especially for parents who filed taxes together in 2019 but have since separated or divorced, there can be unforeseen problems to address. Why? If a couple filed joint taxes in 2019 and the account number on file was a joint account, then the stimulus money may have been direct deposited into the account on file based on the 2019 tax return. If the account on file is no longer a joint account, then the party in control of the account received all of the stimulus money, including the portion for the children, even if your children have resided with the other parent primarily for the past year. Given some taxpayers need for immediate receipt of the stimulus, a potentially a worse scenario is that the former account has been closed. With some taxpayers having already received their payments, the closed account could result in a filer waiting weeks or months for a check to arrive.
Stimulus package: All the new tax breaks parents and retirees could get (cnet.com)—for a discussion of the changes on CTC and stimulus things to consider.
If you are co-parenting with someone that is cooperative and does the right thing even when nobody is watching, be thankful—you probably have your share of the stimulus money. On the other hand, many have spent the past several months working with their attorneys to try and figure out how to get the portion of the stimulus check they are entitled to – without spending more to fight it than they will be entitled to receive. At the end of the day, it is a difficult situation for all involved. There is no simple solution and there are no clear guidelines to address these new additions except for what we can tie together from other areas of tax law—such as dependency exemptions, deductions and credits. One potential solution, in terms of the most recent stimulus, may be to get your 2020 tax return filed as quickly as possible. With many taxpayers having faced lower incomes in 2020 as a result of the pandemic, filing your 2020 return as soon as possible may expedite the correct payment of your stimulus funds and make sure they end up in the right bank account.
If you are currently contemplating divorce, separation, or are awaiting a final hearing on these issues—be sure you consider these types of issues and address them with your attorney. A separation agreement or court order that specifically states which parent claims the child(ren), receives the child tax credit and/or dependent credit, and which parent is entitled to payments, such as stimulus payments, on behalf of the child(ren) can override any default presets by law, or can clear the mud when there are no definite answers defined by law. Make sure your Separation Agreement or custody order protects you, the payments and credits you are entitled to, and contains the language that allows you to enforce these issues against the other parent should they fail to do the right thing. Regardless of where you are in your divorce journey, an experienced family law attorney can help you navigate the quickly changing landscape when it comes to addressing CTC and stimulus check challenges.
5 things you need to know about the CTC change: $3,600 Child Tax Credit for 2021: 5 things you should know – CNET.
Please note that information in this article is subject to change as laws related to this topic change.