Heather L. Locus, Contributor
March 31, 2021
The $1.9 trillion American Rescue Plan Act of 2021 (the "American Rescue Plan") is now enacted. The package expands relief provisions first introduced in the Coronavirus Aid, Relief and Economic Security (CARES) Act from March 2020 and introduces new measures to help families and businesses.
What does this mean specifically for single parents or families going through divorce? There are 3 major components:
- Recovery Rebate Checks (also known as a stimulus check) – for parents and children
- Child Tax Credit – for dependent children
- Child and Dependent Care Tax Credit – for dependent children where the qualifying parent paid for care to work
There are a lot of nuances to this law, so we have included a summary of the package’s major changes. The most important thing to know is that even if you did not qualify in the past, you may now, so it is highly recommended that you ask your tax preparer about your specific eligibility.
Which Parent Qualifies?
For divorced parents that alternate years they claim their dependents, it is important to note that the government will use the last tax return on file to determine who will receive the Recovery Rebate as well as if a taxpayer qualifies to receive any of the credits detailed below.
For example, Jane and Gary are divorced and have a 5-year-old son, Johnny. Jane claims Johnny as a dependent in even tax years (eg: 2020). Gary claims Johnny in odd years. Since Jane has already filed her 2020 tax return, the IRS will use that return as the reference year to determine who will receive the Recovery Rebate as well as the various eligibility for the credits mentioned above.
1. Recovery Rebate Checks
- This new round of stimulus checks is up to $1,400 per eligible individual with income phaseout thresholds starting at $75,000 for single filers and $150,000 for joint filers (see chart below).
- Eligibility this cycle has been expanded for dependents. Dependents previously referred to children ages 17 and under, however, this Act includes all dependents in the household, which can include older children who are still in school (like college age kids).
- Checks will be based on income from your most recent tax return. So, if you already filed your 2020 return, it will be based on your income from 2020. If you have not, then it will be based on your 2019 income.
It is crucial for high net worth families who did not qualify for previous stimulus checks to consider whether they now qualify. This is especially relevant for recently divorced couples since child support is not taxable and neither is spousal support for divorces finalized in 2019 or after. It is common for taxable income to be significantly less than previous tax years filing as a married couple.
If taxpayers are within the income thresholds indicated, the total amount of a household’s Recovery Rebate (aka the amount of the stimulus check a family will be receiving) is calculated by multiplying $1,400 times the total number of eligible individuals in the household.
For example, Linda is a divorced, single mother of two children whom she can claim as dependents. She files as head of household and earns less than $100,000 per year. She will likely receive a Recovery Rebate check of $1,400 x 3, or $4,200 even if she received millions in a property settlement and/or has $100,000+ of non-taxable spousal and child support.
2. Child Tax Credit
Previously, the child tax credit provided taxpayers up to $2,000 for each child 16 and younger. The credit starts phasing out for taxpayers with adjusted gross incomes over $200,000 for single parents (including those filing as head of household) and $400,000 for married filers.
This Act changes a few things.
First, only for the 2021 tax year, the child tax credit is increased from $2,000 under current law to $3,600 for every child under age 6, and to $3,000 for children between the ages of 6 and 17 (one year older than under current law).
The total child tax credit is now divided into two parts where the original $2,000 credit is subject to a phaseout of $200,000 for single filers and $400,000 for joint. However, the increased credit amount will be subject to a lower income threshold level of $75,000 for single and separate filers, $112,500 head of household filers, and $150,000 for joint filers. This means that a single filer that makes $100,000 would be eligible for the original $2,000 credit, but not the new increased amount.
Another important change to the child tax credit is that parents will receive it regardless of their employment status, and the credit is fully refundable. For example, a parent with low taxable income (even if they have high non-taxable spousal and child support) could potentially receive a refund of the full child tax credit amount even if they have little to no tax liability. Parents should be mindful about negotiating who claims the children if the higher income parent would otherwise be phased out of receiving the credit.
Half of the credit can be received in advance by having the IRS send monthly payments to families from July through December 2021. This amounts to a monthly tax credit of $300 per month for every child under 6 and $250 for every child 6 and over. These extra payments can greatly ease childcare payments for parents who have lost their jobs or have had to leave the workforce to care for their children due to the pandemic.
All that to say, divorced parents could be eligible to receive a stimulus check or the child tax credit for the first time.
3. Child and Dependent Care Tax Credit
Taxpayers can use the child and dependent care tax credit if they paid expenses for the care of a qualifying individual to enable them to work or actively look for work. A qualifying individual is a child who is under the age of 13 for the entire year. It can also include a spouse or other dependents who are physically or mentally incapable of caring for themselves, provided those individuals live with the taxpayer for more than half of the year.
In 2020, the tax code provided that a tax credit (based on how many kids you have and how much you earn) could be figured on $3,000 of eligible expenses if you have one child, or $6,000 for 2 or more children. For 2021, the American Rescue Plan will increase the credit to $8,000 of eligible expenses for one child, or $16,000 for 2 or more children.
*Most of the provisions from the American Rescue Plan are temporary for 2021 but may be extended in the future.
Lastly, for 2021, the limit on tax-free employer-provided dependent care assistance is increased from $5,000 to $10,500 (50% for taxpayers filing married separate).
It is important to note that for high earners (those whose adjusted gross income exceeds $440,000), the child and dependent care tax credit will no longer be available despite having been eligible for at least some credit amount in prior years. This is due to the phase out starting point of $400,000 for all filing statuses.
What to Do Next
Many of the changes above are temporary for 2021, but it is possible they may be included in comprehensive tax reform later in 2021. With managing finances in divorce already being a complex topic (on top of a global pandemic!), it’s important to talk with your ex-spouse, attorney and CPA to keep the interests of your children as the top priority while minimizing your taxes.
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