Lots of divorced parents alternate the right to claim child-related tax benefits: Mom gets the exemption in even-numbered years, and Father gets it in odd years (or vice versa).
In 2021, the government passed the American Rescue Plan. That gave a generous child tax credit to single filers with income under $75,000 and joint married filers who earned less than $150,000. A child under 6 qualified for a $3,600 credit, and a child over 6 got $3,000. Starting in July, the IRS sent out advance payments on the credits. For a child under 6, you got $300/month. For older children, you got $250/month. The advance payments stopped in December, so they used up half of the total credit.
The IRS used 2020 tax returns to select recipients of the advance payments. For parents who alternate benefits, that sent the money to the wrong parent. There was a mechanism to reject the advance payments, but parents may have ignored that because they thought this was like the stimulus money that was not a tax credit.
Now, parents who got monthly payments for a child they shouldn’t claim in 2021 feel cornered because they are supposed to repay the advance payments. And parents who should get the tax credit for 2021 are angry because their ex already spent part of it.
Depending on your situation, there are three general answers to the problem.
- If your ex mistakenly accepted advance payments and have a 2021 AGI under $40,000 (or $60,000 if married filing jointly), the IRS has said they will forgive the overpayment. See: IRS Website
- Even if the other parent got advance payments on a credit that is rightfully yours, the IRS tells you that you can still file your tax return and claim the credit. However, this may cause a problem if the other parent actually goes ahead and claims the child on their tax return. In that case, the IRS will most likely reject at least one of your returns.* See: IRS Website
- You can hire an attorney to enforce your Court Order. However, this may not make financial sense due to the cost of litigation. Legal action might make more sense if you have other problems that can be pursued, along with tax enforcement.
If you want an attorney to help you decide the best course of action, or have questions this post didn’t answer, call Bays Family Law at (317) 769-0630 to setup a consultation with us.
*We are not tax attorney’s and you may wish to consult a tax professional on how the IRS would handle this situation.