Divorced families and incentive payments
With Covid stimulus payments ending up in bank accounts, divorced couples argue over whether and how the payments attributed to the children should be split. Unfortunately, these are uncharted waters and very little guidance from the courts or the IRS on how to address the problem.
WHAT WE KNOW
Through the American Rescue Plan Act, the IRS deposits payments into the account identified on the taxpayer’s most recent tax return, which for most applicants is 2019. If the couple divorced in the last year, it means one parent may receive payment for the entire family, including their ex-spouse.
OK … SO WHAT NOW?
Obviously, when a parent receives payment for their ex-spouse, they should pass on what is owed to that person. The question of how to deal with dependent payments is more complicated, mainly because many divorce treaties split or alternate dependency exemptions.
In more than 50% of divorces, the parties share the same parental leave, and in most cases the parties alternate the right to claim the dependency waivers each year, with one parent claiming the children in odd tax years and the other parent claiming the right to claim the Children in even tax years.
Since the stimulus payments are based on 2019 tax returns, the parent requesting the exemption in odd tax years will receive the payments. In this scenario, a strong argument can be made that the incentive payment for the children should be split evenly, and some Michigan courts have issued opinions ordering the payment to be split.
Another problematic scenario is that after filing their 2019 taxes, a married couple is divorced and one parent has custody and the right to claim the exemptions. However, the payment was sent to his ex-spouse as that person tied the bank account to the 2019 tax return. Most would argue that the parent with custody should receive all of the child-related payment.
The main difficulty in most of these scenarios is that the level of stimulus is not even enough to cover an attorney’s expense and that many people are unable to navigate the judicial system on their own. The good news is that there is a free online DIY form that you can use to create a Covid-19 Stimulus Check Payment Application that you can print out and submit to the court if you’ve been divorced or in Divorce Michigan.
WHAT ABOUT THE CHILD TAX CREDIT?
The latest economic stimulus plan creates an even bigger problem for individuals who qualify for the child tax credit. The tax credit increased to $ 3,000 per child ages 6-17. and $ 3,600 for children under 6 for 2021, which means the stakes are higher for parents who can claim the children in odd years. This is even more complicated as the law provides for half of the child tax credit to be prepaid in 2021. However, the prepayments will be made to the parents based on their 2020 tax returns. This means the wrong parent will get the prepayment, which not only creates disputes over who should rightly receive the payment in 2021, but also affects tax returns in 2022.
If you qualify for a child tax credit and you split or alternate the exemptions from dependency on your ex-spouse, the amount of the tax credit can be large enough to justify keeping an attorney to ensure you get the money that You deserve.
In addition, the Covid-19 Stimulus Package legislation requires the IRS to develop an online portal to manage advance payments for child tax credit. Parents should be able to update their tax information and indicate who should receive the prepayments to avoid future headaches.
WHAT YOU CAN DO
While these issues were unique to the pandemic and could not have been foreseen by anyone, it shows why it is important to have the advice of an experienced divorce attorney and / or finalize your divorce through collaborative divorce where you can maintain a civil working parenting relationship. For couples whose divorce has been finalized, the gray area created by the incentive may require a change in their separation arrangements.
If you’ve had or are going through an amicable divorce, open communication with your ex-spouse is key. The stress of the pandemic has brought many otherwise sensible people to their breaking points; It can be easy to lose your cool because of additional financial uncertainty. In shaping the discussion around your common goal, the wellbeing of your children will allow you to approach as allies rather than adversaries.
A version of this article originally appeared on www.amicabledivorce.com.