The Internal Revenue Service (IRS) recently began a program of prepaying a child tax credit. As of August 2021, some parents are receiving $300+ each month now to be applied to their tax return that is due in April of 2022.
But if you and your co-parent alternate years during which to claim your child as a dependent, this prepayment is very likely going to cause major problems.
From Davey Jones of the Jones Law Firm, here’s what you need to know about this new policy and how it will affect your family.
2021 Advance Child Tax Credit Payments
In lots of custody judgment, we frequently allow parents to alternate years to claim a child as a dependent.
For example, in one family, Dad might claim a child in even numbered years and Mom claims in odd.
This has never been a problem for any of my clients until now. But the new Covid-19 related tax benefits just do not work for this scenario.
Let’s stick with our scenario of Dad making the dependency claim in even numbered tax years. Dad claimed the child for taxes in 2020. Because of that, the IRS is going to prepay Dad as much as $3,000 to apply to Dad’s 2021 tax return. The problem is that Mom gets to claim the child in her 2021 tax return, not Dad.
So Dad has now received $3,000 in error.
I have spoken with a couple of accountants, and I believe Dad is going to have to pay back that $3,000.
Hopefully, Dad has other tax credits that offset the debt, but the $3,000 is unearned.
Conversely, Mom is going to get a credit on her 2021 tax return for that same $3,000. Unless the IRS changes the rules (again), because Mom claimed the child in 2021, she would start getting prepayments for her 2022 tax return.
And the problem repeats.
What’s the solution?
My accountants tell me there is no easy fix. The IRS is not going to process a “switch” for prepayments from Mom to Dad. The IRS relies on the previous year’s tax return.
Some lawyers have argued that Dad should just give his prepayments to Mom as he receives them. These lawyers are wrong.
Dad would then have given Mom $3,000, Dad would still owe the IRS back, and Mom would gain an additional $3,000 tax credit when she files her return.
My best thought is this: you should contact the IRS and ask them to NOT send your prepayment of the child tax credit. That way you never get it and you never have to pay it back. When you file your tax return, it will be processed normally without any unearned tax credit.
If you decide not to follow my advice, or if the IRS will not cooperate and you receive the prepayment anyway, keep the money. Just know that you will probably owe it back.
Contact the Jones Law Firm today
As you well know, I am not an accountant. But when my clients encounter a problem, I do everything in my power to try to find a solution. I strongly recommend you talk to your accountant if you are facing a similar issue. If there’s anything else I can help you with in terms of your custody arrangement, contact my Alexandria, Louisiana firm to schedule a consultation.