By Alex Kransnomowitz, CPA and Rory Gannon, CPA at Smolin Lupin
Next month, about 39 million households—with roughly 88% of children in the U.S.—will begin receiving payments from the federal government. As part of the American Rescue Plan Act (ARPA), the IRS will make 2021 advance child tax credit (CTC) payments to eligible parents, starting on July 15.
Divorced parents, however, face a question: which parent will receive the payments?
Why are these new child tax credits different?
The ARPA has temporarily changed child tax credits rules from July 15 through December 2021. The amount has increased, the qualifying threshold has come down a little, and how parents receive credits has changed. Payments will now be received in advance: $300 per month for children under six and $250 per month for children six to seventeen.
The CTC used to be $2000 per qualifying child, but that’s changed for the remainder of this year. Starting in mid-July, the CTC will be $3,600 for each qualifying child younger than six years old and $3,000 for children ages six to seventeen.
The increased credit amount will be reduced or phased out for households with a modified adjusted gross income above the following thresholds:
● $150,000 for married taxpayers filing jointly and qualifying widows or widowers;
● $112,500 for heads of household; and
● $75,000 for all other taxpayers.
However, even if a parent’s income is too high to receive the increased advance CTC payments, they may still qualify for the $2,000 CTC on their tax return for 2021.
What is a qualifying child?
For 2021, a “qualifying child” must be under age eighteen, related to the taxpayer, and claimed by the taxpayer as a dependent. Generally, it also means the child has lived with the taxpayer for at least six months during the year. The child must also be a U.S. citizen or national or U.S. resident.
How and when will advance payments be sent out?
From July through December 2021, the IRS will make advance payments of 50% of the parent’s estimated 2021 CTC. The payments will start on July 15, 2021. After that, they’ll be made on the 15th of each month, unless the 15th falls on a weekend or holiday. Parents will receive the monthly payments through direct deposit, paper check, or debit card.
According to the IRS, eligible parents “are slated to begin receiving monthly payments without any further action required.”
For divorced parents, who receives the payment?
For divorced parents, however, the payments can create a bit of a tangle
The payments will flow to the custodial parent who’s claiming the child as a dependent in the preceding tax year. If the parties have an agreement in place to alternate the years for which children are picked up as dependents, then the parent who claimed the children in 2020 will likely receive the automatic payment, if they fall below the income thresholds.
Yet the payments are advance tax credits for 2021—not 2020. The result may lead to a dispute over who should receive the payments. Ultimately, parents will need to discuss the receipt of these funds so that they are reallocated to the parent who is claiming the children as dependents in 2021, based on the divorce agreement.
With the first payment slated to arrive next month, proactive discussion among the parents may help reduce the stress of all involved.
Have questions about this new credit? We’d love to help—contact our experienced Tax Professionals at any time.
Alex is a Member of the Firm and a licensed Certified Public Accountant in New Jersey with over 15 years of experience. Alex is a Certified Valuation Analyst and member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. In his role on Smolin’s Litigation Support team, Alex leverages his extensive track record and experience servicing clients in both the private and public sectors.
Rory Gannon is a Forensic and Valuation Services Manager with the Firm. He is a licensed Certified Public Accountant in New Jersey. He has experience working in insurance, investment banking and public accounting for over 8 years. He provides companies and their clients with forensic accounting services pertaining to matrimonial litigation, fraud investigation, commercial litigation support, business valuation, and shareholder dispute resolution.
