Divorce Adds Potential Snags to 2021’s Child Tax Credit

An issue over advance payments arises: Who gets to claim the kids as dependents?

Mother and daughters working at table
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Divorced parents may face new dilemmas this tax season: Which one gets to claim 2021’s child tax credit, and what happens if the wrong one got the payments in advance?

Key Takeaways

  • The temporary expansion of the federal child tax credit created a potential point of contention for divorced parents: The credit is more valuable than ever, and advance payments added a new wrinkle.
  • The way the IRS distributed the payments could mean that, in some cases, the wrong parent got the advance payments—leading to an unpleasant surprise at tax time. 
  • While a “safe harbor” provision protects parents from having to repay credits received due to an honest mistake, it only affects taxpayers with lower incomes. 

The expanded credit added a complication—and raised the stakes—to the usual tax time conflicts that divorced parents often have to negotiate, tax experts say. Not only has the question of who gets to claim which children as dependents become more important since the value of the tax credit increased significantly in 2021, but half the credit’s value was sent out ahead of time, adding another wrinkle, tax experts say, if the advance credits were sent to the wrong parent.

“It’s absolutely new and unprecedented from a couple of perspectives,” said Mark Steber, chief tax officer at Jackson Hewitt. “It’s super big, super valuable, and super important to many taxpayers.” 

Parents—and especially divorced parents—had a lot of new rules about the tax credit to grapple with last year. The American Rescue Plan pandemic relief bill temporarily boosted the credit’s maximum value to $3,600 from $2,000, depending on the age of the child and the income of the family. It also delivered half the credit as monthly payments starting last July, with the rest to be claimed on tax returns at the end of the year, as usual.

Not only that, but the credit was made “fully refundable,” meaning that for the first time the full value was available even to eligible taxpayers with no earned income. These changes to the credit, which expired at the end of the year and haven’t been reinstated for 2022, created a few potentially tricky situations that parents may find themselves navigating at tax time.

‘The Happy Day, Rainbow Scenario’

“The happy day, rainbow scenario in a divorce situation is if one parent has single, sole, uncontested custody,” Steber said. “Then the taxpayer will get the child tax credit on their return, no fuss, no muss. In a shared custody situation, there is still a pretty easy path forward,” he added—if the parents divide custody and each cooperates.

In divorces that go smoothly, parents try to divide tax benefits as evenly as possible. Since only one person can claim a child as a dependent in any given year, according to IRS rules, that means alternating which parent claims each child each year, said Jonathan Merel, a family law attorney in Chicago.

“All things being equal, the parties should share the benefits as long as they’re both supporting the children,” Merel said. 

In some cases, that means the parent who makes a higher income would let the lower-income parent claim the credit, since its value is determined on a sliding income scale, Merel said.

Honest Mistakes

Even in that situation, however, there’s a potential complication: The IRS sent out the advance payments based on 2020 (or 2019) tax returns, meaning that whoever claimed a child as a dependent in that year got the advance payments in 2021. But if the parents are alternating years of custody, that could mean one parent received the monthly payments when they weren’t entitled to them.

That parent could have had the IRS halt the payments before receiving them, in which case they wouldn’t owe anything. But if they took the advance payments anyway, they’ll have to pay the money back, and that will be reflected on their 2021 tax return. 

Meanwhile, the “correct” parent can claim the entire value of the credit regardless of what the other one does.

While there’s a “safe harbor” provision that prevents people who made honest mistakes from having to repay their advance credits, it only fully protects individuals who make $40,000 a year or less, or $60,000 in the case of married couples filing jointly.

“Those are pretty low numbers in a post-pandemic world,” Steber said. “Safe harbor is a great rule. Unfortunately, it’s not that safe a harbor.”

The Nefarious Parent

But what if, instead of the happy day, rainbow scenario, something nefarious happens? Say one parent is supposed to be able to claim the child tax credit for 2021, but instead the wrong parent intentionally claims the child and files their tax return first. 

The wrong parent could get the tax credit, and then it would be up to the other parent to prove they’re the one who deserves the credit, forcing them to go back and forth with the IRS to fix the mistake. But that’s a process that could take months or even years, Steber said. 

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Congressional Research Service. “The Child Tax Credit: Temporary Expansion for 2021 Under the American Rescue Plan Act of 2021 (ARPA; P.L. 117-2).”

  2. IRS. “Frequently Asked Questions.

  3. IRS. “Here’s How a Taxpayer’s Custody Situation May Affect Their Advance Child Tax Credit Payments.”

  4. IRS. “2021 Child Tax Credit and Advance Child Tax Credit Payments — Topic H: Reconciling Your Advance Child Tax Credit Payments on Your 2021 Tax Return.”

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