• Traci Provost

GUEST BLOG: What Divorcees Should Know About Stimulus Payments

The pandemic has affected all of us in many aspects of our lives. For those who are divorced or those in the process of divorce, the stimulus checks and Child Tax Credits for 2021 have complicated things even further.

In my divorce financial practice, I often come across a spouse who doesn’t understand what it means to “claim” dependents for tax purposes. Usually, if one spouse stayed at home, they are not as familiar with all the tax laws and may not understand the tax implications after divorce. I have clients whose high-wage earner ex-spouse is taking the child deductions, but because their earnings are beyond the income threshold, it ends up being no benefit to either of them tax-wise, except maybe as a way to punish the unknowing ex. To the lower wage earner, these tax credits can be significant. So, who gets to take the stimulus payments and credits if exes alternate who gets the deduction? Also, what happens if the party claiming the children benefits less than the spouse not claiming the children?

The CARES Act and Economic Impact Payments

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, most Americans are eligible for the third round of stimulus checks (also known as the Economic Impact Payment). Individuals who reported adjusted gross income of $75,000 or less on their 2019 tax returns will receive $1,400 each and $1,400 per child. The plan narrows income eligibility to exclude individuals earning over $80,000 and couples making over $160,000. Singles phase out at an Adjusted Gross Income (AGI) between $75,000 and $80,000. Heads of household phase out at AGIs between $112,500 and $120,000. Couples phase out at AGIs between $150,000 and $160,000.

The new law says that the child’s stimulus payment will be paid to the parent who claimed the child as a dependent on his or her tax return last year. There are various complications with that concept.

  • What if the parties filed a joint return last year and are now in the process of, or have just completed, a divorce?

  • What happens if, in the divorce proceeding or thereafter, it was agreed that the dependency exemption would be alternated?

The answer to those questions is not an easy one, and may require the assistance of an attorney to resolve it. The legislation seems to indicate that the children’s portion of the stimulus will be paid to the parent who claimed the child as a dependent on the last tax return, however, that may not agree with the terms of a divorce decree.

According to Jill Bicks of Bicks Family Law in Westport, CT, these changes “can be a substantial change of circumstances”. Bicks also says, “Alimony and child support are after tax, and a change of this magnitude can affect these calculations".

The Child Tax Credit

Another element from the Biden administration's most-recent stimulus package that may amplify custody disputes is the Child Tax Credit, which for 2021 was increased to a fully-refundable $3,000 for children aged 6 to 17 and $3,600 for children younger than 6 for many families. The credit reduces the tax bill on a dollar-for-dollar basis for taxpayers who report less than:

  • $150,000 per year on joint returns

  • $75,000 for single filers, and

  • $112,500 for head of household

The advanced monthly payments would account for half of a family’s 2021 Child Tax Credit. If families receive it in monthly payments, it would result in payments of $250 per child age 6 to 17, and $300 per child under age 6, for a total of six months.

That increase means people will probably fight harder for the right to claim the child as a dependent in their child support custody agreement, and child support orders as well.

Things Divorced Parents Should Consider

Parents who have not yet filed their 2020 tax returns have an opportunity when they are filing those returns to determine who is going to get the advance payment. If there is any conflict about who it will be, there’s still time to resolve that dispute in Family Court, if necessary. Parents who already have an attorney can ask them to make a phone call or send an email to work out these issues, potentially avoiding Family Court.

An important thing to note is that the IRS can also enforce who gets to claim the credit if they decide to audit a taxpayer. The federal tax agency would look at who has the child a majority of the time in order to determine this.

Of course, there are many exes who don’t get along and will do everything they can to harm their ex, especially financially. Keep in mind that these COVID rules may be extended beyond 2021. If you are unable to reason with your ex to make a decision that best benefits the family, you should consider reaching out to your accountant or attorney. They can offer the best advice about what is ideal for your family in 2021 and beyond, if these laws are extended.

A smart parent will put their own emotions aside and make sure the financial relief is used for the benefit of their children. I have recommended clients put the money into something I refer to as a “kids activity bank account”. This account can be used to help pay for joint expenses involving the children. Using the money in this manner gives both spouses the peace of mind in knowing the money is being used the way it was intended to be. After all, this money is meant to benefit the entire family, but especially, the children.

For more information on this and other financial questions, contact:

Traci Provost Certified Divorce Financial Analyst Divorce Financial CARE 19 Compo Road South Westport, CT 06890 www.traciprovost.com Special thanks to Jill Bicks, Family Law Attorney for Bicks Family Law, for her contribution to this piece. Jill can be reached at: 500 Post Rd. East Ste 200 Westport, CT 06880 www.bickslaw.com

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