When parents divorce, it’s natural to focus first on which parents will have physical and/or legal custody of their children. Once the custody status is resolved, the next step is determining which parent has the duty to pay child support and how much child support should be paid. The impact of children on divorce doesn’t end though with the child custody and child support orders. Skilled Franklin divorce lawyers also analyze how child custody and support orders affect the taxes of each parent.
According to Michelle Petrowski Buonincontri, a certified financial planner, parents need to understand how tax credits and the dependency exemption should be part of any divorce resolution. The American Rescue Plan (ARP) which was signed on March 10, 2021 does change how taxes impact on divorces. Our skilled family lawyers will work with financial planners and tax professionals to understand what the new law means and how it affects the divorce settlement.
The Child Tax Credit (CTC)
The IRS explains that the child tax credit can be claimed if the child is under 17 and a dependent, and the pre-ARP requirements are met.
In divorce matters, the dependency exemption can be allocated to a non-custodial parent. In many divorces, the person who is the non-custodial parent is identified. In cases, where parents have joint custody, your lawyer and financial professional, will need to explain which parent can claim the dependency exemption.
For 2020, the maximum child tax credit was $2,000 for each child – and only partially refundable. The CTC starts to phase out if the parent claiming the child tax credit has a modified adjusted gross income (MAGI) of $200,000 or more if the parent files a single return, and phases out at $400,000 if the parent files a joint marital return (presumably after remarrying).
As a rule, a tax credit is better financially than a tax deduction.
How the ARP changes the child tax credit
The ARP makes the following changes only for the year 2021:
- The child tax credit is $3,000 per child instead of $2,000.
- The child tax credit increases to $3,600 for children who are under six years of age.
- The child tax credit can be claimed if the child is under 18 at the end of the year, instead of the normal 17-years-of-age requirement.
- If the tax filer has no income, the child tax credit is refundable. This benefit is a great help to people with no income or a very small income. Prior to the passage of the new law, a tax filer had to earn at least $2,500 to receive a “refundable” tax credit.
- “Advance payments of up to half of the CTC (maximum CTC of $3,600/child) will be distributed in equal periodic monthly payments by the IRS during the second half of 2021 beginning in July, with the remainder of the credit being claimed on your 2021 tax return.”
In addition, the tax phaseout limits are different for 2021 than 2020:
- Filing as a single. The tax phaseout is $200,000 of MAGI. The tax phaseout is $75,000 MAGI for 2021. This means that people who earn more than $75,000 in 2021, will not be able to claim a full tax credit.
- Filing as married and joint. The tax phaseout is $400,000 of MAGI. The tax phaseout is $150,000 MAGI for 2021.
- Other filing options. The tax phaseouts for married filing separately, head of household, and qualifying widow are the same as for someone filing singly.
What does the new child tax credit mean in practical terms?
Let’s suppose you have three children – ages 3, 11, and 17.
- In 2020, you would receive a $4,000 child tax credit, $2,000 for the 3 and 11-year-olds, and none for the 17-year old.
- In 2021, you will receive a $9,600 child tax credit, $3,600 for the 3-year-old. $3,000 for the 11-year-old, and $3,000 for the 17-year-old.
In this example, the new law results in a benefit of $5,600 – $9,600 as compared to $4,000. If you had no tax liability for 2021 (and only 2021), you’d receive $9,600 from the IRS.
As Larry David might say, “Pretty good. Pretty good.”
How does the new child tax credit affect your divorce?
The new child tax credit aims to help low-income people with children. If you plan correctly, the extra $5,600 can be used to help both parents (depending on what adjustments are made) forge a different property settlement agreement, resolve child support for 2021, or even just put extra money into the pockets of both parents.
According to Ms. Buonincontri, it may make sense for the parent with the lower income (as opposed to the parent with the higher income who typically claims the tax credit) to claim the child tax credit – especially if the non-custodial parent has income higher than the phaseout amount, or if the lower- income parent doesn’t have any income.
One red flag about claiming the child tax credit in 2021
The timing of advance payments may affect the amount of the taxes due. In some cases, parents made need to repay part of these payments. Check with your tax attorney or accountant about this, to see if it applies to you.
How does the new child tax credit affect child support that is overdue?
Per the rules, advance payments “made under these new rules will not be reduced to offset past due child support owed, federal tax debts, state tax debts, and collection of unemployment compensation debts.” This may be an advantage for the parent who is in arrears but a disadvantage for the parents who need the child support to raise their children. “However, the remaining amount due to the party and claimed on their taxpayer’s 2021 return as a refund would generally be subject to offset these obligations.”
At the Law Offices of Adrian H. Altshuler & Associates, our highly respected Franklin family lawyer works with financial professionals when needed, such as when tax laws are enacted. We review how the laws can benefit our clients financially and how the new laws can be used to forge a better more secure settlement for our clients. To discuss all your divorce issues and how taxes impact those issues, please call our office at 615-977-9370 or use our contact form to schedule an appointment. We are strong advocates for parents and spouses in and near Franklin, Columbia, and Brentwood.