What Divorced Parents Should Know About Child Tax Credits

Millions of families began receiving in July advance payments of the Child Tax Credit (CTC), as made possible by the American Rescue Plan.

According to the Department of Revenue, about $15 billion was paid to families of almost 60 million eligible children in the first CTC distribution on July 15. The credits are worth up to $300 per child under the age of 6 each month through the end of the year, and $250 per child aged 6 through 17. The payments will continue through Dec. 15, 2021.

The person claiming the child on their 2019 or 2020 tax return (whichever is the last year they submitted) will receive the payment. But what happens if a different parent is caring for the child now? What if you were married in 2020 but are divorced now? We understand that this is still very confusing, so we’re answering these questions for you below.

What Is a Child Tax Credit?

The CTC is a tax benefit given to American taxpayers to help low-income and middle-class taxpayers support their families. The credit offsets the taxpayers’ tax liability dollar-for-dollar. The credit was created in 1997 as part of the Taxpayer Relief Act. How much parents receive is based on their income and the number and age of their children.

Temporary CTC Changes

There were changes made to expand CTC in the American Rescue Plan to help families struggling financially due to COVID-19.

Prior to 2021, the CTC provided a $2,000 per child credit with $1,400 being refundable. For 2021 only, the CTC was increased to $3,000 for dependents aged 6-17 and $3,600 for dependents younger than 6. The entire amount is refundable. Also, only for 2021, parents of children aged 18 and full-time college students between the ages of 19 and 24 can receive a nonrefundable credit of up to $500 each.

In addition to the increase in CTC, there is another significant change for 2021. Half of the credits are being distributed in advance in monthly installments, and the other half will be claimed by families on their tax returns next year. The advance monthly distribution is automatic, but the IRS has an online portal where you can opt-out.

The money parents receive is an advance of what parents would receive when they file their 2021 tax returns. This means when your refund comes next year it will be less than in years past.

Opting Out of Advance CTC Payments

Only one parent can claim the credit for each child each year; it cannot be split up. The parent who has custody of the child often claims the tax credit, but that could be different based on your divorce agreement. If the custody agreement mandates a 50/50 split, then the parent with the higher adjusted gross income claims the credit. Sometimes parents alternate who gets the credit each year or have other provisions in their agreement.

Since the advance credit payments are based on the most recent tax return the IRS has on file, the parent claiming the dependents for 2021 might not be the one receiving the payments. If one parent claimed the child in 2020 but the other parent will claim the child in 2021, that first parent will still get the advance payments unless another action is taken.

Separated parents are also affected. If the parents of eligible children are separated, but not divorced, and filed joint returns in 2019 and 2020, the advance payment will go to the bank account on the tax year 2020 return, or a check will be mailed to the address of record on the tax return.

Opting out of the payments is one option, thus allowing for the other parent to make the claim on their 2021 tax returns.

Another reason opting out may be a good idea is if you have had a change in income. If your income this year has increased over 2020, you could be receiving higher advance payments than you are entitled to. It is possible that you could owe taxes on this overpayment.

One positive caveat is a safe harbor provision in the American Rescue Plan. If individuals making less than $40,000 receive an overpayment of the credit, they won’t be required to repay the overpayment and it will not be garnished from wages.

Updating Bank Account Information

Instead of opting out of the advance payments, you can also update the banking information on the IRS portal. This will change which bank account is on record to receive payments. Even if who is receiving the payments is not an issue, the bank account you want the payments to go to may have changed. You can change the bank account through the portal.

Repaying the Child Tax Credit

If the parent who receives the advance payments is different from the parent who will claim the deduction on the 2021 tax return, the parent who received the advance payment will have to reimburse the government. The parent who claims them in 2021 but is not receiving the monthly payments will get all their money after they file their 2021 tax returns.

Legal Counsel for Divorced & Separated Parents

If you are divorced or separated and concerned about how your are impacted by the changes to CTC or any other aspect of your divorce, our experienced lawyers at Jetton & Meredith Law can help you understand your options. Family law is a primary focus of our practice, and we have deep knowledge in a wide variety of family matters.

Our firm offers confidential consultations. You can schedule by calling (704) 931-5535 or using our online form.