New tax legislation passed in March 2021 increases the federal child tax credit to $3,600 a year for children ages 5 and younger and $3,000 per year for children ages six to 17. Starting in July, parents can receive periodic payments from the IRS for up to half their available credit amount.
Review the possible complications this new credit poses for divorced parents so you can prepare to navigate this issue.
Check your divorce agreement
In general, if you have custody of your child most of the time, you can claim the entire tax credit. If you share custody relatively equally, your divorce agreement should establish rules for claiming your child as a dependent.
Some parents alternate years, while those who have an even number of children simply each claim half the children as dependents. Talk to your attorney and your former spouse sooner rather than later if you do not have an existing agreement about tax season.
Arrange credit prepayment
Families with these complications can proactively agree on and arrange prepayment of the credit. The IRS must introduce an online portal so parents can direct who should get the credit for each tax year. In anticipation of errors, legislators have waived wage garnishment for credit overpayment to individuals who earn less than $40,000 a year and couples who earn below $60,000.
If you have a higher salary, you could be subject to penalties and fees for overpayment of the child tax credit. Avoid this issue by seeking help and opening communication with your coparent long before you file 2021 taxes.