I am frequently asked right now about the upcoming changes to the 2021 Child Tax Credit. Specifically, parents are asking how the recent changes to the 2021 Child Tax Credit will factor in with the $250-$350 a month Advance Child Tax Credit Payments that are starting mid-July.
Most parents will not have to worry about what happens with the 2021 Child Tax Credit until they file their 2021 taxes, which will be in 2022. However, for the subset of divorced parents who alternate claiming at least one child as an exemption, there is a reason to learn more about these advance payments.
The short explanation of the concern is that the monthly payments that parents are starting to receive right now, having started July 15, 2021, are not like the past stimulus payments, but instead are advance payments of a parent’s 2021 child tax credit. To put a finer point on it, the payments that a parent receives in 2021 might belong to the parent who will claim the child as an exemption on their 2021 taxes.
So why is that a problem? It is because the IRS is paying the 2021 Advance Child Tax Credit payments to the filer who last claimed the child as an exemption, which is likely to be the 2020 filer. Therefore, if parents alternate the exemption, like many divorced parents do, the 2020 filer is possibly getting payments right now that are prepayments of the other parent’s 2021 child tax credit.
The thing that changed this year was that as part of the American Rescue Plan passed in March 2021, the existing Child Tax Credit was increased from $2,000 to $3,600 for younger kids and to $3,000 for older ones. As part of that change, and in an attempt to put more money in the hands of parents right now, the government is pre-paying one half of the 2021 Child Tax Credit over the next 6 months, starting July 15, 2021. They are calling this the Advance Child Tax Credit Payment. The payment will be $300 per month for younger children, and $250 per month for children over 6 years old. The second half of the 2021 Child Tax Credit will be claimed by the filer when they file their 2021 taxes in 2022.
So, what can be done if the 2020 filer is not the 2021 filer? The good news is that the IRS understood that this was going to be a problem for a small group of filers. I say small group because clearly this group was not big enough for them to find a different way of doing this. What they did was to create a portal where any parent could unenroll from receiving the advance payment. This option, however, is not limited to divorced parents who alternate exemptions but is available to any parent who does not want to take the prepayment, and instead wants to claim the 2021 Child Tax Credit on their 2021 taxes when they file in 2022.
The down side to all of this is that even if the 2020 filer does unenroll, the 2021 filer will not receive the Advance Child Tax Credits, and instead will have to claim the entire 2021 Tax Credit when they file their 2021 taxes next year.
A 2020 filer who should not be receiving the advance payments should go to the IRS website and unenroll from receiving the Advance Child Tax Credit.
If the 2020 filer does not unenroll from receiving the 2021 Advance Payments, they will create an issue in 2022 when the other parent files their taxes for tax year 2021, and they will possibly have to pay back the money they received plus a penalty for wrongly receiving the payments.
For answers to other questions regarding the 2021 Child Tax Credit and the Advance Child Tax Credit Payments you should visit the IRS FAQs. If you have additional questions about child custody and income taxes, please contact Blume Law Group to schedule a consultation.