By: Victoria Paone Rosa, Esq.*
If you have young children, you may be able to save money (possibly thousands of dollars) when you file your federal income tax returns next year for 2021.
What has changed with regard to taxes and your children?
Initially, pursuant to the Tax Cuts and Jobs Act of 2017, the tax credit that you received for having a child under the age of seventeen doubled to $2,000,00 per child. Now, pursuant to the American Rescue Act of 2021, the child tax credit can be as much as $3,000.00 per child for children ages 6 through 17, and $3,600.00 for children ages 5 and under. Remember that this change concerns only your federal return, not your New Jersey state income tax return.
What portion of the child tax credit is refundable?
Pursuant to the Tax Cuts and Jobs Act of 2017, the refundable portion of the child tax credit was limited to $1,400.00 per child. Now, pursuant to the American Rescue Act of 2021, the credit is fully refundable for 2021.
By way of illustration, if your tax liability amounts to $4,000.00 and you apply a child tax credit for $3,000.00 (for a child between the ages of 6 and 17), your tax liability will reduce to $1,000.00 for 2021. Likewise, if you owe zero dollars in taxes to the IRS and apply a child tax credit for $3,600.00 (for children ages 5 and under), then you may be refunded up to $3,600.00. That is right, you can get cash back for having children!
What are the necessary requirements for obtaining a child tax credit?
There are several requirements you must fulfill in order to take advantage of this tax savings, the most important of which include having a child age seventeen and younger and living with your child for more than half of the year. In the context of a divorce, the parent of primary residence, or the parent with whom the child resides for more than 50% of the time, is the parent who is eligible to receive this credit. Notwithstanding, parties going through a divorce may be able to negotiate an agreement such that the parties can alternate claiming this credit.
The new law changes who is eligible for the child tax credit. Pursuant to the Tax Cuts and Jobs Act of 2017, single taxpayers with a modified adjusted gross income of up to $200,000.00 and taxpayers filing jointly earning up to $400,000.00 were eligible to claim the credit for $2,000.00 per eligible child. Now, pursuant to the new law, single taxpayers with a modified adjusted gross income of $75,000.00 or less, taxpayers filing head of household with income of $112,500.00 or less, and taxpayers filing jointly earning $150,000.00 or less are eligible to claim the additional credit amount. Above these income thresholds, the extra amount above the original $2,000.00 credit — either $1,000.00 or $1,600.00 per child — is reduced by $50.00 for every $1,000.00 in modified adjusted gross income.
Why is this information important?
Aside from the major increase in the amount of the credit, including the refundable portion, and the fact that parents with 17-year-old children can continue to receive the child tax credit (whereas they were unable to under the Tax Cuts and Jobs Act of 2017), a portion of the 2021 child tax credit may be advanced by the IRS. Instead of waiting until after the 2021 tax returns are filed, up to half of the child tax credit will be advanced to eligible families by the IRS July through December 2021. The advance payments will be estimated from 2020 returns, or if not available, 2019 returns.
Perhaps the most important point to take away from this article is that these changes are only effective for the 2021 tax year. If you are going through a divorce and you have children, it is important that you consult with an attorney regarding the child tax credit, especially as it relates to the 2021 tax year.
* (Editor’s note: Victoria Paone Rosa, Esq. is an associate at the Law Offices of Paone, Zaleski & Murphy working out of the firm’s Red Bank office, located at 120 Maple Avenue. Victoria’s professional history includes clerking in Monmouth County for the Honorable Mara E. Zazzali-Hogan for both the Family part, Chancery Division and Civil Division for 2016-2017. She is currently a member of the New Jersey State Bar, Middlesex Bar Association, Monmouth Bar Association and Aldona E. Appleton Family Law Inn of Court. Victoria limits her practice to divorce, child support, child custody, equitable distribution, alimony, domestic violence, alimony, palimony and all other family law issues. Her monthly column, “Divorce Hotline,” will serve to inform readers as to family law news, advice as to the divorce process, comment on recently published family law cases and more. Paone, Zaleski & Murphy can be contacted at 732-507-9315.)