Any parent should probably think carefully before accepting the advance child tax credit. While this tax credit can certainly help millions of Americans as they deal with the economic pressures of the pandemic, many experts are warning certain individuals to opt out. Like other forms of federal financial assistance in the midst of COVID-19, this tax credit could have significant tax implications down the road. In addition, things can get especially complex for divorced parents.
General Tax Implications of the Advance Child Tax Credit
First, let’s deal with the tax implications for everyone. In 2021, the total credit for families is as much as $3,600 per child under the age of six, and $3,000 per child over the age of six. The credit is fully refundable, which means you can receive money even if you owe no federal income tax. If your financial situation did not really change much since last year’s tax return, you generally will not deal with any unforeseen issues.
However, you could encounter problems if you end up earning significantly more money this year compared to last year. Basically, you could become partially ineligible for the amount of money you received. This means that at the end of the year, you will have to pay part of your tax credit back.
Tax Implications for Divorced Parents
Things can become even more complicated for divorced parents. Often, parents with shared custody take turns when it comes to the advanced child tax credit. This means that one parent receives the credits one year, and then the other parent receives the credit the next year. However, whichever parent claimed the children in 2020 will automatically receive the tax credits in 2021.
This means that the spouse receiving these credits automatically should opt out. If they do not they may be forced to repay the entirety of the tax credit when they file their return. On the other hand, the parent who is claiming the children will not receive any advance payments, but they will get the full value of the credit when they receive their 2021 tax return.
Only One Parent Can Receive the Tax Credit Each Year
If you have shared custody, you may be spending just as much time looking after your children as your spouse does. It might seem like the most logical solution is for the federal government to split the tax credits evenly between you both. However, this is not possible. Only one parent can receive the tax credit each year.
It May Not be an Issue for Divorced Parents
With all that said, this might not be a major issue for many divorced parents. If you are not “taking turns” when it comes to claiming your children as dependents for tax purposes, you do not really need to worry about this. Often, the parent who has custody for more time each year is the only one who receives the tax credit. For example, the children might live with them during the week, while the other spouse might only have custody on the weekends. In addition, there is no danger of being forced to pay back the tax credit if you have earned less than $40,000 over the course of the year.
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