New $3000 Child Tax Credit Could Raise Issues for Divorced Parents

The American Rescue Plan Act signed into law on March 4 included a new child tax credit that will offer a significant financial boost to millions of Americans.

The new law provides updates to the new child tax credit, $1,400 stimulus checks, and expanded unemployment insurance. Families will receive a $3,000 annual gain per child aged 6 to 17 and $3,600 for each child under the age of 6 in the tax year 2021 under the new rules.

Approximately 4.1 million children under 18 are expected to directly benefit and be brought above the poverty line. Another 5.75 million children will move closer to the poverty line, including children of divorced parents and unmarried couples.

The law also instructs the IRS to give advance payments to parents of up to half the credit sum every month beginning in July 2021. Yet, none of the other rules for claiming dependents are altered by the bill. And divorced parents or unmarried couples may face difficulties there.

According to experts on tax policies, the IRS is likely to begin sending the benefits of the new advanced payments made available under the American Rescue Plan to the individual who claims the child on their tax return in 2020. Since the department usually uses the most up-to-date information on paper, this is the case.

They say, "This could create difficulties for children who are moving between parents or households or who have shared custody." This is particularly true for parents who seek the child tax credit in alternating years since one parent will effectively receive the tax credit two years in a row.

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Experts also added that one of the issues they have in determining that child tax credit on an annual basis and doesn't reflect how all children of divorced parents live.

Tax Foundation senior policy analyst Garrett Watson also shares that the Treasury Department and the IRS have not yet released any information on administering advanced payments to parents in split custody arrangements.

Although parents will not be allowed to divide their children for tax purposes - one parent will receive the entire yearly sum - the $1.9 trillion relief bill guides the IRS to create an online platform to help manage the advanced payments. According to Maag, this platform should allow parents to update their tax details and decide who should receive advance payments so that one parent does not receive the tax credit twice in a row if they alternate years.

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New Child Tax Credit Still Unclear

There are other issues left untouched by the new law. Thus, a safe harbor clause has been included by lawmakers to assist with child tax credit introduction and distribution. Individuals receiving less than $40,000 ($60,000 for married couples filing jointly) would not be expected to repay the credit, nor will it be garnished from their salaries.

Of course, Maag cautions, the safe harbor does not extend to everyone. She claims that an upper-income family, where splitting tax years is more common, may not be protected if they make a mistake. She suggests that both parents must update that information since if the wrong parent gets the payment, they will owe it back on their tax return.

Watson says, "Hopefully, the IRS will have more information on this through guidance when they get the infrastructure for advancing these payments up and running." 

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