How the Child Tax Credit is Divided in Family Court Orders

An often overlooked part of divorce and child custody orders is the division of the annual child tax credit. The child tax credit is a credit that the IRS provides for adults to take care of children on their taxes. In most years this is a credit of $2,000.00 per child.  Normally, this is treated as a bit of an after thought in the finalization of family court orders and often the negotiations revolve around who will be able to claim the children on which tax years. The most common breakdown is “Parent A” claiming the children in even years and “Parent B” claiming the children in odd years. The typical goal in dealing with this issue is to divide the tax credit equally among the parties over the duration of the child custody order.

Family law attorneys who have negotiated arrangements with the child tax credit have one major assumption built into their planning; namely, that this particular law will not significantly change. It has been assumed that the equalization of deductions spread across the years will cause for the most equal division of the tax credit. Divorce lawyers weren’t expecting that a once in a century pandemic would radically affect the way the federal government distributes money and handles the child tax credit.  

How the American Rescue Plan Act of 2021 Changes the Child Tax Credit

You have probably heard of the direct payouts that are part of the most recent COVID-19 stimulus package proposed by the Biden Administration and approved by Congress, also known as the American Rescue Plan Act.  A less noticed provision of the bill has turned the assumptions for the child tax credit on its head. Here are a few changes made to this tax credit and where it may cause an issue for your current family court order:

The Child Tax Credit Has Been Increased

The new plan grants parents with children 5 years old and under $3,600 and children 6-17 years old $3,000. This is a significant change from previous years. Besides the overall increase in the credit, the dynamic of providing an additional $600 for children 5 years old and under is also a key difference. A common assumption in most child custody orders is that the child tax credit would remain consistent over the duration of the order. Now, having this wrinkle creates an inconsistency that could inadvertently create an advantage for one parent over the other.

The Expanded Credit is Only for 2021

Since this modification of the child tax credit is a part of a COVID-19 relief bill, the expansion of the credit was only put in place for the 2021 tax year. If your court order uses a classic even years/odd years split, this may create an inconsistency if Congress doesn’t pass legislation making the provisions in the American Rescue Plan Act permanent.  

The Expanded Credit is Prepaid

The concept of the child tax credit being prepaid is probably the most confusing change to the child tax credit. In the past, the value of the child tax credit would come in the annual tax return of the taxpayer who claims the child, and its corresponding credit, on his or her annual tax return For example, if mom has odd years, then she would claim the child, and the $2,000 credit associated with the child, as a part of her 2019 income tax return and most likely receive any money associated with that return in the 2020 calendar year. Under the current law, the amounts of the child tax credit for 2021 will have a partial advance paid by the Federal government to the tax payers in the 2021 calendar year. This advance will be based on the taxpayer’s filings for the 2020 tax year, or 2019 tax year if the 2020 tax year has not yet been filed.  

Although the change of prepaying the credit sounds simple, it can cause dramatic effects on the value of the child tax credit. Going back to our earlier example, mom has the odd years for the child tax credit, so she is entitled to the tax credit for the 2021 tax year. For this example, let’s say the child is 7 years old, and therefore, the tax credit would be worth $3,000. Since the advance is paid upfront based on the 2020 tax year, dad, who would have claimed the child for the 2020 tax year consistent with the child custody order, will receive upfront payments of approximately $1,500 during the 2021 calendar year.

The example above leaves many questions. Does mom now only have a $1,500 credit on the child for the 2021 tax year? Does dad just receive a bonus of $1,500? Does he have to pay the $1,500 back to the IRS since he was not entitled to this credit? Unfortunately, the IRS has not yet released guidelines to answer many of these questions. Perhaps more telling is that right now the guidance provided by the IRS is limited to families, but not necessarily blended families and single parents. The change of having an advanced payment is large enough that there will be a lot of logistical planning to get the payments out to traditional nuclear families. The unique challenges posed by taxpayers who are divorced and in co-parenting relationships, sharing one child across two households, are not discussed by the law or official guidance from the IRS.The lack of guidance has created a lot of uncertainty. 

A Tax Payer Can Receive Less of a Credit if Income is Too High

In a normal year, the child tax credit has been $2,000.00 per child. The amount of income a taxpayer reported had no effect on this amount. For 2021 this has changed. Now, a sole tax payer who makes more the $75,000 per year will receive $50 less of a deduction for every thousand dollars the taxpayer earns over the $75,000 mark. Taxpayers filing married and joint will have a similar reduction for income over $150,000 per year.  

It may be to the family’s benefit to modify who receives the child tax credit in 2021, depending on how much money each parent, or each household, receives.  If one parent or household has a significant difference in income, there may be a benefit to allow the child tax credit to be claimed by the other parent in order to maximize the child tax credit amount.

Create a Plan Now

Much of the problems caused by the changes to the child tax credit are fixable in your child custody order. It is more likely that the IRS will defer to state courts to resolve differences between parents fighting about how to equally divide the child tax credit. It’s important to review what your order says and schedule a discussion with your family law attorney to discuss how to best address the problems that this change in the law may bring your case.  

About the Author

Attorney Devin Shanley has almost a decade of professional experience working in family law, estate planning and elder law, and has served as a Guardian ad Litem. Devin has a commitment to seeing each case as something beyond a legal puzzle to solve. When meeting with clients, he wants to understand the relationships and family dynamics that need to be preserved to have an optimal outcome. Devin primarily focuses his law practice on wills, powers of attorney, trusts, guardianships elder law planning and family law. The family law and estate planning sections at Peterson, Berk & Cross, S.C. offer a FREE, 30-minute consultation.