Child custody issues following a divorce often center around finances, with tax issues often a particularly complicated and contentious issue to navigate. Unfortunately, new tax rules this year regarding the expanded tax credit could lead to one half of a divorced couple benefiting at the expense of the other. While the American Rescue Plan includes relief for many families with children, each parent will need to understand its potential impact on their income taxes.
The American Rescue Plan
Also known as the COVID-19 Stimulus Package, the American Rescue Plan Act of 2021 provides $1.9 billion worth of pandemic-related funding, including money for vaccination sites, direct payments to families, and an expanded child tax credit.
The tax credit for 2021 is divided into two categories:
- $3,000 per child ages six through 17
- $3,600 per child ages five and younger
The credit reduces total tax owed for single filers reporting less than $75,000, joint filers reporting less than $150,000, and heads of household reporting less than $112,500.
How Requesting a Temporary Advance Might Cause Problems
As part of the Rescue Plan’s goal of providing relief quickly, the IRS is allowing filers to request an advance of 50 percent of eligible credit. If granted, the money is paid in seven monthly installments from July through December.
Claiming this credit introduces complicated issues for some divorced couples. Many ex-spouses alternate years for claiming their children on their tax returns. When claiming children on a tax return, the parent typically also files as a head of household.
The potential problem occurs in this way: If the parent claiming the child as a dependent in 2021 requests the advance on the tax credit, the money will go to the bank account of the parent who claimed the child in 2020.
A Related Issue Occurred with Stimulus Checks
Ex-spouses who alternate child tax credits each year have faced similar issues recently. In March of last year, the first stimulus checks were sent. They consisted of $1,200 plus $500 per dependent.
The checks were sent to the bank account the individual used to receive their 2019 tax refund. Additionally, the 2019 refund determines the child’s parent in regards to the extra $500.
However, the bank account information wasn’t always up to date. For couples who divorced in 2019 or 2020, one ex-spouse might have lost access to the account. Additionally, the $500 might not have gone to the parent who needed it the most.
Potential Solutions
“The extent of tax-related financial issues ultimately depends on the personal relationship between the ex-spouses,” said Attorney Tammy Begun of Capital Family Law Group. “If stimulus money is deposited into an account one spouse can’t access, but the parties have an amicable relationship, usually money can be transferred without a major issue.”
If the parent claiming the child as a dependent files by May 17 (2021’s tax day), they’ll likely receive the tax credit. However, if they file an extension, and pay their taxes in the Fall, the credit will go into the account associated with the 2019 return.
Final Thoughts
While the tax credit in the American Rescue Plan provides a much-needed financial lifeline for many families, divorce can complicate the delivery of the payment. Even if the divorced couple doesn’t get along, working together regarding these tax credits is often in the best interest for their children. Each ex-spouse should consult with their respective attorney to help determine what tax credits each parent is eligible to claim, and where those funds will be deposited.
