Lives have changed since 2019, and family dynamics have, too. Lawmakers have struggled to react to changed circumstances quickly enough and to move legislation through that can help taxpayers during these new times. Through COVID relief measures and an economic stimulus package, taxpayers can experience some relief, but it is important to know your options and act quickly, especially when it comes to dealing with the child tax credit after divorce. The very recent and historic American Rescue Plan Act of 2021 is one piece of legislation that reflects these recent changes by making the advance child tax credit available to families.
The team at Keffer Hirschauer LLP is actively monitoring the changes in tax law, especially related to the advance child tax credit. Our attorneys are ready to help you navigate the new legislation to address your particular situation.
New News about Dealing with the Child Tax Credit after Divorce
Since 1997, tax law has provided for child tax credits to parents to offset the expenses of raising a child. The child tax credit reduces your federal taxes for your qualifying children, but there are deadlines to make changes to your choices related to credits.
The American Rescue Plan Act alters the child tax credit scene in some important ways:
- An increase in the child tax credit (CTC) amounts
- An expansion of the age of a qualifying child to children who have not turned 18
- Permission for half of the child tax credit to be distributed through advance payments monthly allotments from July to December
- The allowance of a fully refundable credit for many taxpayers, which means that more low-income households can qualify for the credit
The Congressional Research Service’s detailed report about the child tax credit sets forth a summary and the impacts of this legislation. However, it cannot explain how the tax law applies in your particular situation or whether you would be better off opting out of the advance credit in part or in whole. Your Indianapolis family law lawyer at Keffer Hirschauer LLP can help by reviewing the facts of your case to determine the impact of the child tax credit after divorce.
How Does the Advance Child Tax Credit (AdvCTC) Work?
The advance child tax credit works to get money in the hands of parents faster. Regardless of whether you are dealing with the child tax credit in a divorce context or not, to qualify for the AdvCTC as of 2021:
- A parent must have at least one child who will not turn 18 prior to January 1, 2022
- Parents must make less than $150,000 if filing jointly, less than $112,500 if filing head of household, and less than $75,00 if single to receive the maximum AdvCTC
- A parent must have a main home in the United States for at least six months of the year
- A parent must live with the child who is claimed as the dependent for at least half the year, although there are some special rules for exceptions in cases of legal separation and divorce
Payment of the advance child tax credit works this way:
- Half of the credit is paid through monthly checks or bank deposits
- Half of the credit is treated as a tax refund when taxes are filed in 2022
Parents do not have to file taxes in order to obtain the credit. However, a parent who does not file taxes must register through the IRS Child Tax Credit Update Portal to receive the credit.
What’s Different about the Advance Child Tax Credit after Divorce?
Difficulties can arise when parents disagree on which parent can take the credit, especially when there has been a divorce. Only one parent can claim the child tax credit and get the advance payments. Generally, this parent must live with the child for more than half of the year in 2021, so parents should be aware of the following facts when planning for advance child tax credit payments after a divorce:
- The credit cannot be split or shared, even in cases of joint custody
- The credit goes to the parent who claimed the child on the 2020 tax return or, if neither parent filed a return in 2020, the credit goes to the parent who claimed the child on the 2019 tax return
- The parent who receives the credit in 2021 should be also claim the credit on that parent’s 2021 tax return
If a custodial parent agrees to allow the non-custodial parent to claim a child on the 2021 tax return, then the custodial parent will need sign and give the non-custodial parent a IRS Form 8332, which is a Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. The non-custodial parent attaches this form to the 2021 tax return to claim the other half of the credit. Your Indianapolis family law attorney can help determine when such forms are necessary and complete these forms to make sure the child tax credit after divorce goes to the correct recipient.
What if a Non-Custodial Parent Wrongly Claimed a Credit?
If a non-custodial parent claims a child without the custodial parent’s permission, the custodial parent’s next steps can vary depending on the situation. If the non-custodial parent did not file a tax return for 2020 and will not claim the child for 2020, the custodial parent can simply be sure to claim the child when filing a 2020 tax return or register on the IRS portal for child tax credit to receive the credit.
However, if the non-custodial parent did file a 2020 return, the custodial parent will need to decide on the best course of action. Sadly, some custodial parents will only learn about the wrong parent receiving the payments when the custodial parent’s 2020 return is rejected. The family law attorneys at Keffer Hirschauer LLP can help facilitate communication between parents so that the non-custodial parent fixes the situation by:
- Filing an amended return
- Opting out of the credit
- Turning over to the custodial parent the AdvCTC payments when received
What Are Tiebreaker Rules, and Why Use Mail?
In some situations, filing your return through the mail can prevent your return from being rejected outright. If someone else already claimed the tax credit for your child, your 2020 return will be rejected if you file electronically. However, if you file a 2020 return by mail, the IRS will apply tiebreaker rules.
The tiebreaker process is straightforward:
- The IRS sends a letter to both parents
- The IRS may request information to help the IRS determine with whom the child lived the most during the year
Unfortunately, the IRS may take some time to decide. It is helpful to have a child tax credit attorney on your side during this time to help facilitate, when possible, faster resolution and payment.
How Can I Trace Where an AdvCTC Payment Went?
Knowing where a payment was made can help, and the IRS has a process for that called a payment trace.
A parent can file an IRS Form 3911 by mail or by fax to start the process of a payment trace. When to start this process depends on how the payment was sent. If the payment was:
- Sent by direct deposit, then request the trace after five days
- Sent by check in the mail to a regular address, then request the trace after four weeks
- Sent by mail to a forwarded address, then request the trace after six weeks
- Sent by mail to a foreign address, then request the trace after nine weeks
The request should be made using the correct form and at the right time. Consult with your child credit tax attorney at Keffer Hirschauer LLP to make sure your request is accurate and timely. The response time of the IRS is out of the control of you or your attorney, but delays can be avoided if your documentation for the child tax credit after divorce is correct the first time around.
What if Circumstances Changed since Your Divorce Settlement?
A lot has changed since 2019. If you have a situation with an existing divorce settlement and a waiver by the custodial parent for more than just 2020, the custodial parent can revoke the waiver by filing IRS Form 8332 when filing 2021 taxes in 2022.
However, if the non-custodial parent who claimed the credit pursuant to a waiver earns less than $40,000, that parent may be entitled to repayment protection. An Indianapolis family lawyer from Keffer Hirschauer LLP can review the facts of your situation to help you determine and understand the tax implications of the child tax credit after divorce.
Is There Any Reason to Opt Out of the Child Tax Credit?
Tax law can be tricky, especially when considering the child tax credit after divorce. The Advance Child Tax Credit is an advance, meaning that it is a payment made before it would normally be due, here, after filing your 2021 taxes. The year 2021 is not over, yet, and that means if you receive the credit payments now, the money you receive now will reduce the amount of the child tax credit you can claim on your return when you file for 2021.
A couple of situations could impact your decision to receive the advance child tax credit this year instead of claiming all of it when you file your 2021 tax return:
- Your income has increased
- Someone new can claim your child as a dependent
You may also consider the impact of not using the child tax credit after divorce this year if you do not need the help this year. Opting out this year would mean that you could receive a larger refund check next year.
The IRS provides a frequently-asked-questions document that answers some of the questions related to the topic of unenrolling. However, it is best to consult with an Indianapolis divorce attorney at Keffer Hirschauer LLP to avoid an unpleasant surprise at tax time next year.
What If You Receive Advance Child Tax Credit after Divorce by Mistake?
If you have received but are not eligible for or entitled to an advance child tax credit, you will generally need to pay the IRS back. However, there are exceptions to the payback requirement for the following:
- If you are unmarried and your income is less than $40,000
- If you are head of household and your income is less than $50,000
- If you are married and your income together is less than $60,000
Contact an Advance Child Tax Credit Attorney at Keffer Hirschauer LLP
Every parent’s situation is different. Having access to articles that help explain the child tax credit is no replacement for advice from experienced legal counsel. The family lawyers at Keffer Hirschauer LLP help parents navigate the changing landscape of child tax credits and provide much needed and timely counsel on advance child tax credit after divorce. To learn which approach works best for your particular situation, contact our office today by calling us at (317) 857-0160 or by completing our online contact form.
The information in this blog is for general informational purposes only, and viewing or reading it does not create an attorney-client relationship. This blog is not a substitute for legal tax advice from a licensed tax attorney, accountant, or other tax professional. Please consult a licensed tax attorney, accountant, or other tax professional regarding your specific case or circumstances.