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The child tax credit reduces the tax burden on families with dependent children. In cases of divorce where there are an odd number of children, it is relatively common for the divorced parents to alternate claiming the tax credit for the “extra” child.
For the year 2021, however, due to the American Rescue Plan which provides pandemic stimulus, not only has the child tax credit been increased (from the standard credit of $2,000 per child to up to $3,600 per child), but the entire credit may be taken as a refund. Even though the tax credit increase phases out as income increases above certain thresholds, the entirety of the credit may be taken as a refund this year, wherein in years past the refund was limited to a maximum of $1,400.
The American Rescue Plan directs the IRS, for this year only, to send advance payments for up to half of the credit amount starting on July 1st. And here’s where the potential for confusion is created: the IRS will send the child tax credit payments to the parent who claimed the child as a dependent the 2020 returns. In other words, this means that notwithstanding any agreement to alternate the child tax credit, the parent who got the benefit in 2020 may also receive the direct cash payments from the IRS in 2021.
We are still awaiting final guidance from the IRS on this issue, but now, more than ever, it is important to speak to a member of the Cohn Lifland Family Law Team to try to avoid an “odd” result with regard to the allocation of child tax credits.