Get ready to answer your phone – possibly a lot! Starting July 15, millions of families will start receiving monthly Child Tax Credit payments. Your clients could be among them, and they’ll definitely have questions.
As part of the $1.9 trillion American Rescue Plan of 2021, signed into law in March, roughly 39 million families will receive periodic advance payments on the Child Tax Credit (CTC) of up to $300 per month per child.
The monthly payments are scheduled to begin on July 15; as the law now stands, these advance payments only affect the 2021 tax year.
This is likely to generate a surge in phone calls from clients because there are aspects of the advance payments that may be difficult to comprehend. To ensure that your clients remain as calm as possible, you might want to take the initiative by educating clients in advance.
You want to be sure that they receive the payments to which they are entitled, and tell them that they can contact IRS if it is sending them the wrong amount.
Some of your clients will ask how parents sharing custody will be affected – especially in cases where one parent is paying child support to the other parent.
Child Tax Credit Changes for 2021
The Child Tax Credit has increased for 2021. For 2021 only, a parent can receive up to $3,600 per child under six years old, and $3,000 per child between six and 17 years old. Previously, the amount was $2,000 for all eligible ages.
This year, the credit will apply in full, even if there is no tax due. That means that, if there is no tax due, the credit will take the form of a direct payment from the government to the taxpayer.
The credit phases out for higher incomes. For a head of household, the phase-out begins at $112,500 of income. For single or married filing separately, it begins at $75,000. For couples filing jointly, it begins at $150,000.
Who will receive the full Child Tax Credit and advance monthly payments?
Not only does the law increase the Child Tax Credit, but the government is doing something new this year: it is giving advance refunds of the credit.
By way of comparison, consider the Current Income Credit. For many years, this credit has resulted in a refund payable to taxpayers. It is typically payable when tax returns are filed, the following February, March, or April.
In contrast, the Child Tax Credit in 2021 will be paid in advance. Eligible households receiving the full amount can expect monthly payments this summer of $300 for children under six and $250 for older children.
To determine eligibility for the credit, the IRS will use your clients’ 2020 federal tax returns. That return specifies the incomes of the parties, the Social Security numbers of dependent children, and which party is claiming the exemption for those children. This is enough information for the IRS to calculate the new Child Tax Credit.
The advanced Child Tax Credit payments are intended to total half of an eligible household’s total credit. The remaining half will be claimed as part of their 2021 tax return in the traditional way.
While some details are still being resolved, you may need to reassure your clients that no action is required right away, aside from filing their 2020 tax returns.
Clients will have the option to decline the advance payments for 2021 and opt to take it all at once in 2022 as a tax credit. The IRS is working to set up an online web site where people can log in and make that selection.
Especially in situations of divorce, the key information may have changed. For example, a different party may be claiming the exemption than the IRS expects; the website will also enable people to change that key information.
If the IRS makes payments in error, it is not going to attempt to recover the full amount, especially for lower income taxpayers. So that will be free money to the lucky recipients.
Is this tax change permanent?
The American Rescue Plan currently extends the CTC expansion for 2021 only.
But the administration’s American Families Plan has proposed extending it through 2025. There has also been some support for making the CTC expansion permanent.
It is vitally important that family law attorneys fully understand these changes and the impact they will have on cases effective immediately and potentially well into the future.
This high level of understanding will enable you to better serve your clients and help you educate other lawyers involved in your cases, as well as mediators and even judges.
How does this affect cases involving child support?
If you practice in a state where tax refunds can count as income for child support, the CTC will affect the amount of child support to be paid.
Family Law Software has already incorporated the details of the American Rescue Plan and the expansion of the CTC, allowing you to ensure the numbers are accurate for your clients.
Also in the software, you have the option to easily see child support with these provisions included or excluded.
When you include the American Rescue Plan’s changes in a dissolution case, Family Law Software calculates the CTC under current law, along with individual stimulus payments each party should have received, applicable child dependent care credit, and Earned Income Tax Credit.
It then uses the resulting tax as a deduction in the child support calculation.
You want to be sure to do this so 2021 child support is calculated correctly. Then you might want to turn the tax provisions off so you can see what an appropriate child support number might be for 2022.
For practitioners, we recommend that you negotiate a different child support amount for 2021 than you do for future years.
You might also want to specify that, if the tax provisions of the American Rescue Plan Act are extended, the amount of that child support continues at the 2021 level.
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