Parents who share custody of their children have lots of questions about the monthly child tax credit payments being sent by the IRS from July to December this year. Which parent should be getting the payments? Should the parent who is getting them opt-out of the child tax credit payments? Does the parent who isn't getting payments lose out on the child tax credit? Confusion surrounding these types of issues can add unnecessary frustration for parents trying to figure out how the monthly payments work.
Fortunately, the IRS has provided much-needed guidance for parents with shared custody arrangements. For instance, the tax agency describes how it determines which parent should receive the monthly payments. It also advises some parents who are currently receiving payments to opt-out or risk having to pay the money back. And the IRS explains how qualifying parents who aren't receiving monthly payments can eventually claim their money. This information should clear up some of the uncertainty divorced, separated, or unwed parents have about the 2021 child tax credit payments.
Changes to the 2021 Child Tax Credit
Before diving into these specific topics, it might help to go over the changes made to the child tax credit for the 2021 tax year. For 2020, eligible parents could claim a $2,000 credit for each child 16 years old or younger. It was gradually phased-out for married couples filing a joint return with income above $400,000 and single or head-of-household filers with income over $200,000. For some lower-income taxpayers, up to $1,400 per qualifying child of the credit was refundable if they had earned income of at least $2,500. That means the IRS issued you a refund check for the refundable amount if the credit was worth more than your income tax liability.
The American Rescue Plan, which was enacted in March 2021, significant expanded the credit for the 2021 tax year (and only for the 2021 tax year). For instance, the credit amount was increased to $3,000 for each child six to 17 years of age and to $3,600 for each child 5 years old or younger (also note that the upper age limit was increased from 16 to 17 for 2021). However, for families with higher incomes, the extra amount ($1,000 or $1,600) is reduced – potentially to zero. For single filers, the extra amount starts to phase-out if their adjusted gross income exceeds $75,000. The phase-out is triggered at $112,500 for head-of-household filers and $150,000 for joint filers. The credit amount can also be reduced under the pre-existing $200,000/$400,000 phase-out rules. The credit was also made fully refundable for the 2021 tax year, so tax refunds resulting from this year's child tax credit can be greater than $1,400, and the $2,500-of-earned-income required was dropped.
Then, of course, there's the new requirement that half the 2021 child tax credit be paid in advance through monthly payments sent between July and December of this year. For parents receiving all six payments, the maximum monthly amount is $250 for each child 6 to 17 years old and $300 for each kid age 5 or younger. If you don't want the monthly payments, you can opt out of the advance payment process. If you don't opt-out and accept all six of the monthly payments, the remaining 50% the total credit amount can be claimed on your 2021 tax return. If you opt-out of some but not all the monthly payments, every dollar you receive from July to December will be subtracted from the child tax credit you'll claim on your 2021 return. (Kiplinger's 2021 Child Tax Credit Calculator will estimate how much your monthly payments should be and how much to claim on your 2021 return.)
Which Parent is Getting Monthly Child Tax Credit Payments?
If a child's parents share custody, the IRS determines which parent will receive monthly child tax credit payments based on who claimed the child tax credit on their 2020 tax return. If you claimed the credit for your child on your 2020 return, then you'll receive the monthly payments. If your child's other parent claimed the credit for 2020, then he or she will receive the payments. If you didn't file a 2020 tax return, or if it hasn't been processed by the IRS yet, then the determination will be based on your 2019 return.
Who will claim the child tax credit for the 2021 tax year doesn't matter for determining who will receive monthly payments this year. So, even though the monthly payments are actually advance payments of the 2021 credit, you won't receive monthly payments this year just because you will claim the credit for your child when you file your tax return next year. Again, it's based on your 2020 (or 2019) return.
Should You Opt-Out if You're Receiving Monthly Child Tax Credit Payments?
Now let's turn the tables. What if you're receiving monthly child tax credit payments, but your child's other parent will claim the child tax credit next year on his or her 2021 tax return? In effect, you're getting advance payments of a tax credit you won't be entitled to claim. Should you just keep getting the monthly payments, or should you opt-out? It depends on your filing status and income.
If your 2021 modified adjusted gross income (AGI) is expected to be at least $80,000 (single filers), $100,000 (head-of-household filers), or $120,000 (joint filers), then you definitely should opt-out of future payments. That's because you're just going to have to repay all the money you received from July to December anyway when you file your 2021 tax return next year. (For information on opting-out, see How and When to Opt-Out of Monthly Child Tax Credit Payments.)
On the other hand, if you think your modified AGI for 2021 won't exceed $40,000 (single filers), $50,000 (head-of-household filers), or $60,000 (joint filers), then go ahead and continue receiving payments if you don't mind taking money from Uncle Sam for a credit you can't claim on your return. That's because there's a "safe harbor" built into the law that completely shields lower-income Americans from the repayment requirement.
If your modified AGI for 2021 is in the middle – i.e., between $40,000 and $80,000 (single filers), $50,000 and $100,000 (head-of-household filers), or $60,000 and $120,000 (joint filers) – then there's a complicated formula used to determine how much, if any, of the money you receive this year will have to be repaid when you file your 2021 tax return. (See You May Have to Pay Back Your Monthly Child Tax Credit Payments for details on the formula and an example of how it works.) If you think you'll have to repay some or all of your monthly payments, then it's probably better to just opt-out now and minimize the payback amount. Otherwise, you could be surprised by a larger tax bill or reduced refund next year when you file your return.
Loss of Child Tax Credit?
As mentioned above, who will claim the child tax credit on their 2021 return doesn't affect who will receive monthly payments this year. The opposite is also true: Who receives monthly payments this year won't impact who can claim the child tax credit on their 2021 return.
So, if you're otherwise entitled to claim the child tax credit on your 2021 return, you'll still be able to claim the full amount of the 2021 credit for your child even if the other parent is receiving monthly payments this year. The other parent's decision to opt-out or not opt-out also won't affect your ability to claim the child tax credit on your 2021 return. As a result, even though you may not be getting monthly payments this year, you'll still get your money – you'll just have to wait until you file your tax return next year.
Rocky is a Senior Tax Editor for Kiplinger with more than 20 years of experience covering federal and state tax developments. Before coming to Kiplinger, he worked for Wolters Kluwer Tax & Accounting and Kleinrock Publishing, where he provided breaking news and guidance for CPAs, tax attorneys, and other tax professionals. He has also been quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other media outlets. Rocky has a law degree from the University of Connecticut and a B.A. in History from Salisbury University.
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