In many states, federal income taxes are deducted when calculating child support. Therefore, anything that changes federal income tax will also change child support.
The American Rescue Act introduced dramatic changes in the Child Tax Credit, the Child Care Credit, and the Earned Income Credit – but only for 2021.
Consider Negotiating Child Support Differently for 2021
Because these changes are dramatic in 2021, they may have a significant impact on child support itself. Here’s an example:
- There are two children, ages 1 and 3.
- The lower-income spouse earns $3,000 per month.
- The higher-income spouse earns $6,000 per month.
- The children spend all of their overnights with the lower-income spouse.
- The cost of childcare is $1,300 per month.
Given this scenario, how much does the American Rescue Plan affect child support in 2021?
We have calculated this for a range of states, which you can see here. The states in our sample with the biggest impact were Michigan, Minnesota, New Jersey, Ohio, and Pennsylvania.
We examined the impact of the 2021 tax changes plus the stimulus checks on child support in 13 states. To do this, we created a simple scenario with the following elements:
The bottom line is that the difference can be dramatic – up to several hundred dollars per month.
But by its terms, the American Rescue Plan provisions apply for 2021 only (for the most part). Next year, they will be gone.
What can you do about that?
One approach would be to calculate child support both ways: with and without the plan provisions.
- For the computation with the plan provisions, let that be support for 2021.
- For the computation without the plan provisions, let that be support for 2022 and beyond.
That way, support accurately reflects the changes in after-tax income that we have in 2021 and that are scheduled to vanish in 2022.
You could also provide that if the American Rescue Plan tax provisions are extended past 2021, then the 2021 child support amount will continue for the years that the provisions are in effect.
2021 Tip: the Child Tax Credit Exemption
Another dramatic change stemming from the American Rescue Plan concerns the Child Tax Credit (also known simply as the Child Credit).
In a hypothetical scenario with two children under the age of six, the child tax credits available jump from $4,000 in 2020 to $7,200 in 2021 – an increase of $3,200!
And, in 2020, only $2,800 of the $4,000 was refundable, whereas in 2021, the full $7,200 is refundable.
(A refundable credit is one that results in a government payment to the taxpayer if – as often happens – total credits exceed total tax due.)
Note that in 2022, the child tax credit is scheduled to drop back down again to 2020 levels.
What Does This Mean for Your Clients?
As we think about it, it is key to remember that parties may negotiate which party claims the child tax credit. (This is because parties may negotiate which party claims the exemption, and only the party who claims the exemption may get the child tax credit.)
This change raises the stakes on who claims the exemption.
Also, think in particular about situations where the parties alternate exemptions. You really want the alternation to happen in such a way that your client claims the exemption in 2021.
It can make a difference of thousands of dollars to your client.
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