The tax credit that parents receive to help offset the cost of raising children could be a bone of contention this year between ex-spouses and parents who alternate years when they claim a child on their tax return.
That’s because this year, under the recently enacted American Rescue Plan, the federal government will allow half of the child tax credit for next year to be paid in advance to whichever parent claims the child in 2020.
“If somebody is getting an advance on a tax credit that’s based on the prior year of filing then that money is actually entitled to go to the other spouse,” said Elizabeth “Li” Connolly, a partner at Connolly Steele & Co. in Avalon.
The expanded child tax credit for 2021 is $3,000 per child from ages 6 through 17; and $3,600 for children under age 6. The credit reduces the tax bill on a dollar-for-dollar basis for taxpayers who report less than $150,000 per year on joint returns; $75,000 for single filers; and $112,500 for head of household.
Many divorced couples with children will be claiming the head of household filing status in the year that they are claiming their child on their tax return.
This year, as part of the massive relief package to help tackle the COVID-19 pandemic and stimulate the economy, the Internal Revenue Service will be creating an online portal for people to request a temporary advance of 50% of the eligible 2021 credit to be paid out in monthly installments from July through December.
This could be tricky for divorced couples who switch each year in claiming their child on the tax return, which is a common arrangement between ex-spouses that is often written into divorce agreements.
“There are going to be some very interesting complications that come about as a result of this new tax law,” Ms. Connolly said.
It wouldn’t be the first time the government tried to jump-start the economy and wound up leaving some ex-spouses in an awkward situation.
The same thing happened when the CARES Act was signed into law in March 2020 and the first stimulus checks — $1,200 per person with an extra $500 per dependent — were sent out.
There were problems with those stimulus payments because the money was sent to bank accounts where taxpayers had deposited their refunds from 2019.
In many cases where couples split, one of them no longer had equal access to the bank account where the checks were sent and there were some squabbles that had to be ironed out in court.
“We are going to probably see some of the same things going on with this refundable child tax credit advance payment in 2021 because it will probably be paid to the parent who declared the child as a dependent on their 2020 tax return,” said Brian Vertz, a partner at the Pollock Begg law firm, Downtown.
Mr. Vertz literally wrote the book on divorce and taxes. He is the co-author of “Divorce Taxation,” an industry manual on the topic, which has been in print for the past 35 years and is now in its 19th edition.
He said people who are filing their taxes now to meet the April 15 tax deadline need to know that whoever declares a child as a dependent this year will likely be the one who is entitled to the advance payments.
But there’s a technicality that could reverse the outcome.
Whoever claims the child for 2020 will get the tax credit, “unless at the time when the tax payment is released they haven’t filed their 2020 return,” Mr. Vertz said. “Some parents are going to file an extension and wait until the fall.
“In those cases, the IRS is going to look to their 2019 returns,” he said.
Tax season also happens to be the peak season for divorce filings in Allegheny County, based on civil court records. Divorce lawyers say the trend is consistent nationwide because couples looking to divorce usually wait until after the holidays, which is why the fewest number of divorce filings occur in December.
The Egan, Minn.-based FindLaw.com declared March as “Divorce Month” after analyzing filings across the U.S. with Westlaw, a legal research database. The analysis revealed divorce filings historically spiked in January, continue to rise and then peak in late March.
Sorting out the child tax credit won’t be a problem for parents who split on good terms, but not all divorces and separations are amicable.
Mr. Vertz said parents have an opportunity when they are filing their 2020 returns in the next few weeks to determine who is going to get the advance payment. And if there is any conflict about who it will be there’s still time to resolve the dispute in family court, if necessary.
“Parents who have lawyers can also just have their lawyers make a phone call or send an email to work out these issues without having to go to court,” he said.
The more combative cases involving the March 2020 stimulus payments had lawyers involved. On some occasions, they ended up in court. But some ex-spouses and parents decided it wasn’t worth the expense or the hassle to fight for their share of the money.
With the child tax credit, the stakes could be high enough to at least try to fight for the payment.
The advanced monthly payments would account for half of a family’s 2021 child tax credit. If families receive it in monthly payments it would mean payments of $250 per child age 6 to 17; and $300 per child under age 6 for six months.
That could add of to a nice chunk of change for many families.
For example, a family with three children ages 12, 7 and 5 could collect $800 a month from the IRS from July through December for a total of $4,800. The family would then claim the additional $4,800 in child tax credits when they file their 2021 return next year.
It could make sense to get a lawyer if the communication between parents is poor, but Mr. Vertz said the resolution would need to be efficient.
“It’s not worth five phone calls and two court appearances,” he said. “A long drawn out battle isn’t going to benefit anyone.”
Tim Grant: tgrant@post-gazette.com or 412-263-1591
First Published: March 17, 2021, 9:47 a.m.
Updated: March 17, 2021, 9:47 a.m.
