With divorced and divorced parents still adapting to the changes in tax law introduced by the Tax Cuts and Jobs Act in 2017, a new wave of changes must also be considered with the American Rescue Plan passed by Congress in March 2021 article Define and explain the impact of these recent changes.

The change in economic follow-up payments paid in 2020 and 2021 is forcing divorced parents to clarify which parent has the child portion of the first and second economic follow-up payments paid in 2020 and now the third payment in payment in early 2021. It is likely that the parent who claimed the child on their 2019 tax return received payments for the economic impact for that child. However, if another parent claims the child on their 2020 tax return, that parent can request the refund credit on line 30 of Form 1040 and receive the 2020 payments retrospectively as a credit on their tax return.

In addition, the IRS does not require any portion of the payment received to be repaid. The consequence could be that ultimately both parents receive the child-related payments. If the parents divorced in 2020 and their joint income in 2019 was too high to be eligible for an economic impact payment, the parent claiming the child now may also be eligible for the refund credit and the defaulted payments received if his or her sole income is below the limit of US $ 95,000.

The change in the dependency release and child tax credit is still misunderstood and incorrectly recorded in many divorce agreements. For tax purposes, the first test to determine which parent has custody is to delineate the parent with whom the child will stay most nights during the tax year. Equal custody rules are becoming more and more common. It is important to know that there is a second test: which parent has the higher adjusted gross income. The parent with custody can register as head of the household and not as a single person for the tax year. The results of these tests could be that the “custodial parent” for tax purposes could be different from the custodial parent for maintenance purposes, as determined by national law.

The exemption from child benefit is currently suspended from 2018 to 2025. Therefore, stating which parent is taking long-term care waiver is essentially meaningless in a divorce settlement. The real problem that needs to be resolved is determining which parent is taking advantage of the child tax deduction. The IRS has provided guidance that the child tax credit can be released to the non-custodial parent using Form 8332, just as the dependency exemption was previously. The American Rescue Plan will increase the child tax credit for 2021 from $ 2,000 per child to $ 3,600 per child under six and to $ 3,000 per child under 18 at the end of the tax year. The loan begins to expire when a taxpayer has an adjusted gross income of $ 75,000 and disappears completely at $ 240,000. In addition, those who are entitled to the increased credit based on their income in 2020 will receive monthly payments as an advance on the child tax credit from July 2021 and do not have to wait until their 2021 tax return is filed.

Another loan tied to the parent claiming the child as a dependent is the care loan. This credit is due to the parent who claimed the child for the tax year, earned income and actually paid the expenses for work-related childcare. Under the American Rescue Plan, credit starts at 50% of expenses up to $ 8,000 for one child, $ 16,000 for two or more children, and is gradually reduced for taxpayers with incomes between $ 125,000 and $ 400,000. This change applies to the 2021 tax year only and brings the previous amounts of 35% of expenses up to $ 3,000 for one child and $ 6,000 for two or more children with a reduction to 20% of expenses for taxpayers with tax incomes over 43,000 USD year 2022 and years thereafter.

Both the expansion of the child allowance and the care allowance did not come into effect until the tax year 2021 through the American Rescue Plan. However, President Joe Biden recently launched the American Families Plan, which would maintain the child tax credit extension through 2025, when the original provision expires, and make the care credit extension permanent.

These additional payments described herein do not change any child benefit that is and is currently paid by one parent to another. The party who benefits from these recent tax changes and receives child support will not automatically suffer a reduction in child support. The payer would have to file an amendment and get a new court order to reduce child support based on the tax break. It is unlikely that such an action will be successful as the additional payments are for a limited period of time and are not expected to continue in the future.

This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.

Information about the author

Robert “Bob” Boyd is the co-founder and partner of Boyd Collar Nolen Tuggle & Roddenbery and a leading family lawyer recognized by colleagues across Georgia and across the country. He can be reached at [email protected].

Elizabeth “Beth” Garrett is a partner in the Divorce Litigation Support Practice at Frazier & Deeter, primarily assisting high net worth individuals and corporate executives with divorce, tax and accounting issues. She can be reached at [email protected].

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