Divorced parents often have a lot to navigate.
And the latest stimulus package has been further dumped on the negotiating table in the form of improved tax credits.
The $ 1.9 trillion U.S. bailout plan provided relief for Covid-19 to millions of Americans, including increases to three cancellations in 2021: the child tax credit, the tax credit on earned income and tax credit for the care of children and dependents.
These enhanced tax credits can cost thousands of dollars for eligible families and increase the complexity of divorce cases, according to financial experts.
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“These credits are now becoming the negotiating points that used to have support for the spouse,” said Sallie Mullins Thompson, a certified financial planner and certified public accountant for the firm with her name in New York.
Ex-spouses can deduct alimony payments for divorces completed before 2019. However, the Tax and Job Reduction Act of 2017 reduced this benefit for newly divorced people, reducing the chances of tax savings, he said. to say.
While the tax credit for income earned and the tax credit for children and dependents require wages or payments for work, the tax credit for children does not have the same requirement, said Davon Barrett, CFP and senior advisor to Francis Financial in New York.
“It’s a good amount of money, regardless of the job status,” he explained.
This flexibility has made the tax credit for children (up to $ 3,600 for children under 6 and $ 3,000 for children ages 6-17) more important to discuss divorcing parents, he said. dir Barrett.
To qualify for the child tax credit, parents must cover at least 50% of their children’s expenses and must live with them for at least half of the year.
However, ex-spouses may allow the other parent to claim the cancellation by filling out Form 8332 and attaching it to the 2021 return.
In some cases, it may make sense for the spouse with the highest income to cover the child tax credit, assuming they do not overcome the progressive eliminations of income, Mullins Thompson said.
A parent presenting as a head of household is beginning to phase out the improved amount with adjusted gross income in excess of $ 112,500, and an applicant will not receive the full amount once he or she earns more than $ 75,000.
Unless you are in cash, I would not recommend taking them in advance.
Including Barrett
Senior Advisor to Francis Financial
In addition, advance payments can cause problems for some divorced parents, as the IRS uses the 2020 income for their eligibility.
“Unless you have a cash income, I wouldn’t recommend bringing it up front,” Barrett said.
However, those who have already received payments can still turn off future payments or set aside money for possible liabilities at the time of the taxes, he said.
Working with a tax professional can be the best way to avoid problems, especially someone who is already familiar with each spouse’s finances, Barrett said.
Future legislation
Although President Joe Biden proposed that the improved tax credits be permanent in the American Families Plan, it is unclear whether Congress will extend those benefits from 2021.
However, those who end divorce should be proactive. Divorced people can discuss possible extensions and address who can claim what credits with their language, according to Mullins Thompson.
However, no matter what happens in Congress, experts agree that it is better for divorcees to first discuss the consequences.
“The sooner you put it on the table, the sooner you’ll be able to find solutions,” Barrett adds.