Most parents are familiar with the Child Tax Credit program, which allows you to reduce the federal tax you owe by $1,000.00 for each qualifying child under the age of 17 who resides with you. A qualifying child includes your son, daughter, foster child, brother, sister, stepbrother, stepsister, or a descendent of any of them (such as your grandchild, niece, or nephew). You also must have claimed the child(ren) as a dependent on your 2020 tax return. Based on the information you provided in your 2020 tax return, the IRS will automatically determine if you qualify and, if so, automatically enroll you in the Advanced Child Tax Credit program for 2021.
This is important for divorcing parents—they will likely want to alternate which parent will claim the child(ren) as dependent(s) each year so that each parent is able to receive the Child Tax Credit every other year. Divorce attorneys typically draft a provision for claiming dependents and the tax benefits associated with that in a Judgment and Decree.
Historically, parents receive the Child Tax Credit after they file their federal tax returns. However, as of July 2021, the Child Tax Credit has been changed to allow for an Advanced Child Tax Credit, whereby the IRS will pay half of the total credit amount in advance via monthly payments beginning July 15, 2021.[1] Parents can then claim the other half of the credit when they file their 2021 income tax return. As of now, this change applies to the tax year 2021 only, but that could change based on new legislation.
The Advanced Child Tax Credit is important for divorcing parents to be aware, because these monthly payments will have a similar effect as stimulus payments where there are few established laws or regulations in terms of which parent is entitled to them. If you are in the midst of a divorce, you could be the primary parent with sole physical custody, but the other parent filed federal taxes in 2020 as the head of household and therefore the Advanced Child Tax Credit will be deposited into their account. Technically, there is nothing established requiring that parent to give you half of the credit, as with stimulus payments. This is why it is important to address these credits with your spouse and determine an equitable way to distribute these credits or use them to negotiate a child support agreement.
Parents can visit the IRS.gov website to see if they are eligible for the Advance Child Tax Credit. However, note that eligible taxpayers will be automatically enrolled in the program and may receive monthly payments as early as July 15, 2021. If you have questions about how Child Tax Credits impact your divorce, call the family law attorneys at Heimerl & Lammers today at (612) 294-2200.
[1] https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
