Protective mask for face masks and tax revenue for 2020. Concept for personal finance during … [+]
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Co-parents divorced and never married have the option to receive an additional $ 1,100 per dependent child when they submit their 2020 return. It requires trust, collaboration, and running multiple versions of your 2020 returns. It’s probably not what Congress intended when it worked through the package, but remember Reilly’s First Law of Tax Planning – it is what it is. Deal with it.
The ability arises from the unique way in which economic impact payments (i.e., stimulus tests) interact with the recovery discount credit. To simplify this discussion, I’m assuming that no one has adjusted Gross Income (AGI) above $ 75,000 when the loan expires. To participate, I recommend that you refer to the Recovery Discount Credits Worksheet on page 58 of the Form 1040 instructions. Despite the widespread availability of various types of software, Reilly’s Seventh Law on Tax Planning – Read Instructions – continues to apply.
A simple example
We’re going to go through the form twice and I’ll try to explain it well enough so that you can follow persistent people who don’t look at the worksheet. Robin and Terry are divorced. Robin has custody of Kyle, who was born in 2011. Robin and Terry adjusted gross earnings of about $ 60,000 each. Terry pays child support but has never worried about getting Robin to share the exemption for Kyle. Lots of couples take turns and they’ll likely get the gust of wind if they just keep going. Terry pretty much thought that neither of them would die penniless and that they would both leave everything to Kyle. So why do the little things sweat? (By the way, this attitude greatly reduces the stress of divorce).
Here we go. Let’s not worry about the yes / no questions. Robin, Terry, and Kyle all have valid Social Security numbers, and neither Robin nor Terry are dependent on anyone else. Robin’s form is pretty simple. Robin’s first EIP check was $ 1,700- $ 1,200 for Robin and $ 500 for Kyle. So skip those lines and put a zero on line 7. The second check was $ 1,200- $ 600 for each of them. So more skipped lines a few zeros and we’re done. No discount credit for Robin. You already have yours, Robin.
If Robin continues to claim Kyle is addicted, Terry’s worksheet will be exactly the same as Robin’s. But what if Terry claims Kyle for 2020? Terry will have $ 1,700 on row 7 and $ 1,200 on row 11. Since Terry’s AGI (line 11 on page 1 of 1040) is $ 60,000, additional lines are skipped and those amounts are moved to lines 15 and 18, respectively, where the payments Terry received are deducted from them and add the results together, resulting in a $ 1,100 credit.
But what happens to Robin, who got the $ 1,100 upfront, so to speak? Nothing. The IRS made it clear back in August, and there is nothing to suggest that the second EIP has changed anything.
Or, for example, you received $ 500 for your child that you claimed on your 2018 or 2019 tax return. You are not claiming the child on your 2020 tax return because the child’s other parent is claiming the child. You don’t have to repay the $ 500 even if the child’s other parent claims $ 500 for the same child on their 2020 tax return.
Complications
Robin passes Terry the exception with Form 8332. The IRS tends not to look past Form 8332 so I think Robin and Terry can do this with a handshake. Legal formalities could get through eleven hundred dollars pretty quickly, but I’m not going to give you legal advice.
The 8332 form shifts child tax credits, so Robin and Terry, who split and split the net income, might be a little tricky. This is where collaboration and trust come into play. The 8332 form does not affect the head of household’s enrollment status or credit for earned income.
Still, consider Reilly’s Sixth Law of Tax Planning – Don’t do the math in your head. Make both returns in both directions and look at them carefully. Also, you need to consider how the child loan works under the law currently in force under Congress (American Rescue Plan Act of 2021-ARPA). This can include a monthly payment.
The requirement of trust, collaboration, and transparency might make it impossible for some couples to take advantage of this windfall, but others will manage it.
Until 2021
It can go from good to great here, but maybe not. Under ARPA, the upfront $ 1,400 per dependent is based on the 2019 return, unless the 2020 return has already been submitted. As with the EIP last year, the revaluation of the tax return for 2021 will only benefit the taxpayer. So if Terry rushes to make the 2020 return, both checks will get for $ 2,800 instead of $ 2,800 for Robin and $ 1,400 for Terry. But maybe not.
The draft law calls for regulations or guidelines to ensure that “to the greatest possible extent administratively practicable”:
… a natural person is not taken into account more than once, not even by different taxpayers and also due to a change in the status of joint return or dependent status between the tax year for which a refund amount is set and the tax year for the Es a credit is determined in accordance with subsection (a)
Will it be “administratively practical” for the IRS to decipher this egg? I have to let you judge for yourself. I would say when you get the extra $ 1,400 set aside just in case.
For what’s worth it, the first couple I talked to about it had (remember, this doesn’t just apply to divorced people. It also applies to people who are together and never married, which is pretty much these days common), some strange circumstances made the strategy impractical. I picked up this idea from Andera Carr CPA on #TaxTwitter.
So far, I’ve only heard of practitioners whose clients stumbled into the gust of wind, which I noted would happen if they took turns taking the deliverance. I don’t see any reason not to be proactive other than that you wouldn’t bend down to raise $ 1,100 if that meant you had to speak to your ex, which is a good reason in many cases.
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