The American Rescue Plan: How Will It Affect Separated and Divorced Parents?
Many Americans have faced financial crises since the start of the pandemic. This past March, the American Rescue Plan Act was enacted into law in an effort to provide economic support to many families by making changes to the Child Tax Credit, Child Care Credit and Earned Income Credit. To understand how this may affect divorcing parents, contact Garden City divorce lawyers, Fass & Greenberg to schedule an appointment. Every year, parents can claim a tax credit for their dependents, but the IRS rules allow each dependent to be claimed only by one taxpayer. For married couples filing jointly, this is not an issue. However, for divorced parents, as well as those who are not married, this can pose a problem since only one parent can claim a child each year. If one parent has custody of the child for the majority of the time, typically that custodial parent is the one who claims the credit. However, if the parents have 50/50 joint custody, typically the parent with the higher income is the one who will stand to gain the most financially will request the credit Parents are encouraged to work out their own agreements. Many parents choose to alternate who claims the tax credit each year. Other parents with an even number of multiple children may divide up their children as dependents and each claim a set amount per year. However, keep in mind that the American Rescue Plan’s changes to the Child Tax Credit for 2021 raise concerns for parents in some situations.
Specifically, For 2021, the Child Tax Credit has been increased from $2,000 per child to $3,000 per child age 6 and older and $3,600 per child under the age of 6. In addition, the 2021 credit is fully refundable, which helps low-income people who are eligible to claim the dependent exemption. The credit is scheduled to be partially dispersed in monthly payments through the second half of 2021, with the remainder being claimed on your 2021 tax return. Because eligible parents will be receiving part of the tax credit in advance over several months, it is likely that the benefits will be sent to the person who claimed the child on their tax return in 2020. This can be problematic for parents who alternate who claims the child tax credit each year, as one parent will essentially be receiving the benefit for 2020 and at least some of the increased benefit for 2021. The legislation directed the IRS to create an online portal where people can update their tax information, which will be important for parents to make sure that the correct parent receives the payment, depending on the terms of their agreement. Consulting Fass & Greenberg, LLP, who are knowledgeable family law attorneys is essential to making sure this increased credit is fairly distributed between you and your child’s other parent. It also may be necessary to make changes to prior arrangements to account for this increase in tax credits for 2021 that may financially advantage one parent over the other.
In addition, the American Rescue Plan will also implement changes that affect the Child Care Credit and the Earned Income Credit, just for the year 2021. These changes will affect child support calculations, since many states deduct federal income taxes when calculating child support. If you are paying or receiving child support, it would be beneficial to consult an attorney to understand how these policies may affect your child support. It may be wise to calculate the child support obligation based on the provisions of the American Rescue Plan and compare with what the obligation would be without those provisions. Since the plan is only effective for the year 2021, an attorney can help you specify what the support obligation will look like for 2021, and what the support obligation will look like in 2022 when the plan is no longer in effect. It would be wise to come up with an agreement between the parties that recognizes these changes and implements them equitably, so that each parent is receiving fair treatment in terms of child support obligations. While the American Rescue Plan was put into effect to help many Americans financially, it can have some negative consequences for separated or divorced parents who have custody arrangements and child support obligations to take into consideration. If you are in a situation where the plan’s policies may alter your child support obligation or award, or your arrangement for the child tax exemption, contact the attorneys at Fass & Greenberg to protect yourself financially.