Many taxpayers are in a situation where they share custody of one or more children with the child’s other parent. While tax law changed in 2018 and eliminated a deduction for dependents, there are still child tax credits and other tax benefits that are only allowed if you claim the child as a dependent.The first question, when parents are divorced or separated, is always which parent is entitled to claim the child. And the answer is pretty simple to the IRS. Absent an agreement otherwise, the parent the child spent more than one-half of the year with is entitled to claim the child. That means, in a non-leap year, the home where the child spent 183 nights is entitled to the deduction. That parent is called the “Custodial Parent” and the other parent is the “Non-custodial Parent”.
There is only one way the non-custodial parent can legally claim the child, and that is for the custodial parent to release the claim of exemption. In my experience, this is normally done by a simple agreement of the parents, but in order to guarantee that the non-custodial parent will be entitled to claim the child, the parents should fill out Form 8332, which is a formal release of the claim to the exemption. The custodial parent can release the claim to exemption for the current year, or for multiple future years. If the claim is released for multiple future years, the custodial parent can decide to revoke the exemption, but only for years following the year in which you notify the non-custodial parent of the revocation.
In a lot of cases, the custodial and non-custodial parent will agree to split the tax benefits and alternate claiming the child. In 2020, when the IRS began sending out Economic Impact Payments (stimulus checks), the payments were based on previously filed tax returns. There were plenty of situations where both parents were able to receive the payments for children, even though they alternated the exemption. In 2021, a similar situation is happening because the third payment is reconciled on the 2021 return.
The third payment, which was for $1,400 per taxpayer and qualifying dependent, was generally based on the 2020 tax return. If 2020 was a year for the non-custodial parent to claim the child, that parent should have received a stimulus payment for that child, as long as the parent’s income was below the appropriate threshold. The custodial parent, again assuming qualifying income, would not have received a stimulus payment for the child, but will be able to receive the payment as an additional credit on the 2021 tax return.
The non-custodial parent will not claim the child on the 2021 tax return, but there is no requirement that the stimulus payment received must be paid back. However, there were also advance payments in 2021 of the child tax credit, and in some situations, the parent not entitled to claim the child in 2021 received those payments. There are limited exemptions that don’t require the credit to be repaid, but in most cases the parent that received the payments in error will be required to repay those amounts with their 2021 tax return.
If you received the full stimulus payment you were entitled to, there is no need to report the payment on your 2021 tax return. But if you didn’t receive the full amount, you may be entitled to receive more. The Advance Child Tax credit must be reconciled on your 2021 return. Depending on your income, you may be entitled to more, or less. Be sure you’re reporting the correct amount and receiving the full amount you are due.
During busy season our time is limited to respond to questions. We will respond as quickly as possible, but we request that you email your questions to info@fawandassociates.