Child Tax Credit
Recently, Congress approved a third round of stimulus money, a portion of which is based on the number of dependent children in your household. Specifically, subject to income limitations, each qualifying child in your house will receive up to $1,400. A qualifying child is a child listed as a dependent on your Federal Tax Return, and the IRS is looking to tax returns to determine eligibility. But before you can understand how stimulus money applies in a divorce, it is necessary to first understand how tax exemptions are handled in a divorce.
The Internal Revenue Code section 152(d)(1) defines a dependent as a relative (child, sibling, or step-sibling) of the taxpayer who has resided with the taxpayer for more than one-half of the calendar year. However, the IRS has an exception that permits the parent with whom the child resided less than one-half of the year to claim the tax exemption. Specifically, IRS Form 8332 allows one parent to authorize the other parent to claim the child on his or her taxes for a given calendar year. Whenever a court issues or modifies a child support order, it must determine which parent is entitled to claim the child tax credit based on a number of factors including the amount of time the child spends with each parent, the financial circumstances of the parent, and earned income credit eligibility. If the court determines a parent who is not the residential parent is entitled to the child tax credit, it will issue orders that the residential parent must take whatever action is necessary to allow the nonresidential parent to claim the child; failure to cooperate can result in contempt of court.
That being said, the overwhelming majority of domestic relations courts in Ohio will alternate the child tax credit with one parent claiming the credit in even-numbered tax years and the other parent claiming it in odd-numbered tax years. When there are two children, the court will allow each parent to claim one child each, and when there is an odd number of children, the court will alternate one child and split the remaining children. There are, of course, exceptions, but this is rarely an argument that actually goes to trial. (However, it is fairly common to file a motion for contempt when one parent claims a child tax credit in violation of the court’s orders.)
With a general understanding of how the court divides the child tax credit, we can now discuss how this affects economic stimulus money.
Federal Stimulus Money
Because determining whether a child is a dependent for the purposes of receiving stimulus money is based on filed tax returns, the parent who claimed the child as a dependent most recently will receive stimulus money for that child. There is no rule that specifies which parent, residential or nonresidential, will claim the child tax credit in even versus odd years, so decrees are not consistent from one case to the next. This means that it is very possible the nonresidential parent claimed the child most recently and will receive stimulus money for the child.
The question then becomes whether a domestic relations court will entertain awarding the residential parent the amount of stimulus money received by the other parent. Because allocating the child tax credit is a component of child support, which falls under the jurisdiction of the domestic relations court, a court has the power to order that the parent receiving the stimulus money must transfer it to the other parent. However, we have not seen courts take this position through two rounds of economic stimulus payments and there is nothing to suggest it will do so now, meaning the parent that receives stimulus money for a child will likely keep it.
Finally, it is worth noting that there are many cases in which both parents receive stimulus money for the same child. Because determining a dependent for stimulus purposes is based on tax returns, and the vast majority of parents who share custody or are subject to court orders alternate claiming the child tax credit, there is a potential loophole. For example, if the residential parent claimed the child tax credit in 2019 but has not filed 2020 tax returns, and the nonresidential parent claimed the tax credit in 2020 and had already filed 2020 tax returns at the time the eligibility for the stimulus money is calculated, it is very possible that both parents will receive stimulus money for the same child.
If you have specific questions about the child tax credit or your economic stimulus eligibility for a dependent child, you should consult an attorney or tax professional to discuss your situation.