What Happens to the Child Tax Credit in a Divorce?

What Happens to the Child Tax Credit in a Divorce?

The Child Tax Credit is increasingly worth fighting over in divorce court.

The March 2021 American Rescue Plan Act (ARPA) provided for six early payments of the Child Tax Credit, a tax break intended to help cover the expenses of parents with children during the coronavirus pandemic. Prior to March, the credit was set at $2,000 per child per year, and made non-refundable, so parents owing less than $2,000 in taxes would not be able to fully benefit from it.

The ARPA increased these payments by fifty percent, to $3,000 per month. It also added a $600 bonus for the parents of children under the age of six, and it made the tax credit fully refundable, meaning that families who did not owe enough in taxes would receive the difference as a cash payment. Lastly, it arranged for half of the credit to be sent out in the form of six advance checks—the first of which was sent on July 15, and the third of which will be sent on September 15.

These payments—particularly for large families—can be worth thousands of dollars. It comes as no surprise, then, that they often make their way into divorce cases, along with other tax breaks such as the Child and Dependent Care Tax Credit. In particular, though, the fully refundable status of the Child Tax Credit separates it from other tax credits, which generally require the recipient to work and pay taxes in order to receive the benefit. This means that the Child Tax Credit is increasingly worth fighting over in divorce court.

Given this, rules have been established for how the Child Tax Credit is given out. The recipient must cover at least fifty percent of their child’s expenses and live with them for at least half the year. This usually means that the parent who gains custody of the children will receive the tax credit. There is, however, a form—Form 8332—for parents who willingly give up the tax credit to the other parent, even if they do not technically meet the guidelines required.

One possible reason is that the credit has an upper-income limit. In previous years, this limit has been $200,000 for single tax filers and $400,000 for couples filing jointly. However, the ARPA reduced this level to $75,000 for single filers, $112,500 for heads of families, and $150,000 for couples filing jointly.

In this case, if one person makes $200,000 per year, and the other makes $60,000, it makes little sense for the higher earner to claim the credit since for them it would be worthless.

It is not clear how much longer the current situation will last. The increase in the Child Tax Credit will only last until the end of 2021, despite the attempts of some lawmakers to extend it; after this, the payments will return to being worth $2,000 per year and become non-refundable once more. This means that the relevance of the higher payments in future divorce cases is likely to decrease.

Trevor Filseth is a current and foreign affairs writer for the National Interest.

Image: Reuters