Tax Update 2022: Child Tax Credit for Separated or Divorced Parents

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If you're a divorced or separated parent, now is the time to discuss who will claim each child as dependent on your 2021 tax return to maximize the child tax credit. Talking with a family law attorney can also give you more insight.

A Family Law Attorney May Help Increase Your Child Tax Credit

We've talked at length about the 2021 child tax credit and which divorced parent gets it. But if separated or divorced parents continue to split or alternate child tax dependency, they may be leaving real money on the table in 2021 and 2022.

Well-informed parents should consider the special tax rules for the current year and next year that have dramatically increased the child tax credit.

A qualified child age 6 to 17 listed on a parent's/parents' return will result in up to a $3,000 (per child) credit for the parent who claims the child if income is within the required parameters.

A child under the age of 6, who is a qualified dependent, will allow a parent/parents a tax credit of $3,600. If you don't owe taxes, the unused credit amount is paid to the parent by Uncle Sam.

Usually, one-half of the credit will be used or paid to the parent after filing the final return, and each dependent is named.

Identify Which Parent Takes Each Dependent for Tax Purposes

If a parent has received tax credit payments already but fails to deserve the tax credit, you'll have to return the money to the government.

Since July 15, 2021, parents who appeared to qualify based on their 2020 tax return have received one-half the pre-paid enhanced child tax credits with 50% allocated over the six months of July to December.

The parent(s) could have received $250 or $300 a month for each qualified child. If the parents were fully qualified to receive the child tax credit, they would have received $1,500 to $1,800 with the tax credit balance applied to the 2021 tax return.

In some cases, the parent's actual income in 2020 during the pandemic was meager, and 2021 tax credit payments were sent. If due to higher revenue in 2021, the parent who received the tax checks doesn't qualify for the tax credit, some or all of the money received over the six months will be due and owing when filing the 2021 federal tax return.

Parents need to confer and make a wise decision as to who claims each child as a dependent on their 2021 tax return(s) to maximize the tax credit and adjust the payments, so they flow to the correct parent to qualify for the balance of the 2021 tax credit. Our family law attorneys can support in deciding dependency claims.

Child Tax Credit with Separated Couples

What if you're separated but not divorced and plan to continue filing jointly in 2021?

If your combined income is too high to qualify for the child tax credit and you file separately, the lower-income parent qualifies for the enhanced child tax credit.

If you separated in 2021 (from July 1 through the end of the year), a parent could qualify as Head of Household status if they satisfy the IRS requirements. In addition, the parent who legitimately files as Head of Household would be eligible for the child tax credit benefit if that parent's income were under $112,500.

Both the dependency declaration and the physical custody schedule are relevant.

In many cases, parents equally share physical custody; however, to file as Head of Household, that parent needs to have more than equal custodial time. The threshold to get the full enhanced child tax credits on a joint return is $150,000, and a couple that is still married could choose to continue to "Married filing Jointly" and retain the full child tax credit.

A parent who files as "Single" will qualify for the child tax credit if that person's income is under $75,000.

Divorcing Couples Should Arrange for a Dependency Exemption

If a couple is getting a divorce or is separated, they should not hesitate to negotiate a special arrangement for the dependency exemption for 2021 and 2022. The pending Build Back Better legislation will likely continue this enhanced child tax credit only through 2022. The prospect of an indefinite change in the tax law seems dim.

Many parents are wise enough to look at the shifting dependency exemption and the benefit of the child tax credit without resorting to litigation. However, a couple in litigation might speculate that the child support award may change if one parent gets the enhanced tax credit.

Realistically the change in child support is likely modest. However, it would be wise for the couple to look at this excess income as funds to benefit the child or children. Many families have child care, summer camp, or other extra expenses for each child. During tough economic times, having this money to ease the burden on both parents should offset the sacrifice of forfeiting a dependency exemption for a year or two.

Talk to a Family Law Attorney About Your Child Tax Credit

Let's face it. Tax laws can be confusing. But you can make sure you get the best credit possible by speaking with a family law attorney in our Bucks County law offices. They'll offer appropriate guidance on how you can best benefit from this unique opportunity to reduce taxes and enjoy the extra cash from Uncle Sam.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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