Couples ending their marriage must deal with numerous personal and financial matters during their negotiations. Recent enhanced tax benefits may be worth thousands of dollars for eligible families and complicate divorce cases.
Changing tax picture
The recent $1.9 trillion American Rescue plan was intended to provide relief to Americans for the economic and health disruptions over the last year. It increased write offs in 2021 for the child tax credit, the earned income tax credit and the child and dependent care tax credit.
These tax credits are replacing spousal support as negotiating points. Spouses may deduct spousal support for divorces finalized before 2019. But changes to the federal tax law in 2017 eliminated that credit for new divorces and reduced options for tax savings.
Child tax credit
The child tax credit is worth up to $3,600 for children under six and $3,000 for children between six and seventeen. Unlike the earned income tax credit and the child and dependent tax credit, the child tax credit does not require employment wages or payments.
A parent needs to cover at least 50 percent of their children’s expenses to qualify for the child tax credit. The parent must also reside with their children for at least half of the year for eligibility.
Sometimes, a higher-earning spouse may elect to collect the child-tax credit if they do not exceed the income phase-outs. A spouse may give up this credit for the other spouse by completing a form 8332 and submitting it with their 2021 tax return.
A parent who files as a head of household begins to phase out for the enhanced amount with a modified gross income exceeding $112,500. A single filer does not receive the credit’s full amount after they earn over $75,000.
The advanced payments, however, may cause complications for some divorcing couples because 2020 income determines eligibility. Unless parents are having cash problems, they may not want to take the credit up front. But parents who received payments may still elect not to take future payments or put money aside for potential future tax liability.
There are further complications for couples. It is unclear whether Congress will extend these tax credits beyond 2021.
Couples undergoing divorce should consider and discuss potential extensions and which spouse may claim this credit. Their divorce agreement should address this matter.
Attorneys can help spouses consider their options and their potential consequences. They may also assist them with seeking a fair and reasonable agreement.