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Divorce and the child tax credit

Dear Clients and Friends,

As part of the American Rescue Plan Act (ARPA) of 2021, Congress provided families with a $3,000 tax credit per child under 18 and a $3,600 credit per child under six. This credit is also refundable. Families have been receiving half the credit in monthly increments since mid-July, and will receive the other half upon filing their 2021 income tax return.

This benefit could raise issues between divorced or single parents. That’s because according to IRS regulations, each minor dependent can only be claimed by one taxpayer, leading to a potential dispute over who gets the tax credit.

In most cases, the parent with physical custody a majority of the year gets to claim the credit. However, a custody agreement that splits parenting time equally might result in the parent with the higher adjusted gross income claiming the credit.

In other cases, divorced or unmarried couples might come to some sort of agreement. For example, if they have more than one child, each might claim different ones as dependents. Or they might alternate the years that they claim a dependent for tax purposes and fill out the relevant tax forms accordingly.

The structure of the payments under ARPA could cause complications. That’s because the IRS is likely to send the monthly benefit to the person who claimed the child as a dependent on their 2020 tax return, which would be the most up-to-date information that the IRS has on file. This could create issues where children are moving between households or for families who alternate years claiming their children as dependents for tax purposes.

Given the complexity of these issues, if you are going through a divorce right now, you should consider talking to us about how to resolve these potential issues with the other parent. If you are already divorced, it may be worth calling us to discuss the possibility of modifying your custody arrangement given this change in the law.




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