How can the Child Tax Credit affect your divorce or separation in Pennsylvania?
Most everyone going through a divorce is aware of the one major implication the Tax Cuts and Jobs Act of 2017 has on their divorce – the Child Tax Credit. Read on for tips on how to negotiate it into your settlement.
In divorce settlement agreements signed after December 31, 2018, alimony is no longer tax deductible to the payer or tax includable to the receiving spouse. Little known, however, are the other ways that the Tax Cuts and Jobs Act can affect your divorce or separation. One of these changes allows many more taxpayers to benefit from the Child Tax Credit.
The Child Tax Credit is a tax credit worth up to $2,000 per qualifying child in 2018 and forward. The credit is one key effective way for divorcing parents to reduce Federal income tax bills. Taxpayers eligible for the credit subtract it from the federal income taxes they would otherwise owe. But only one parent can claim the CTC, if filing separate returns .
For example, if you owe $5,000 in taxes without the CTC, but have two qualifying children, you would only owe $1,000, because the credit would reduce your tax bill by $2,000 for each child.
, but have two qualifying children, you would only owe $1,000, because the credit would reduce your tax bill by $2,000 for each child.
Why wasn’t the Child Tax Credit a more hotly-contested commodity before 2018?
The Child Tax Credit is not a new thing. It predates the Tax Cuts and Jobs Act of 2017. But though the CTC always existed, the income threshold, prior to the TCJA, was low enough that many couples did not qualify. The TCJA has increased the adjusted gross income level threshold to$200,000 for single filers and $400,000 for joint filers. By contrast, in 2017 the phase-out level was $75,000 for single filers and $110,000 for joint filers. The TCJA also increased the credit from $1,000 per qualifying child to $2,000 per qualifying child. The CTC is also refundable up to $1,400 which means if you qualify for the CTC and it brings your tax liability (how much you owe) below zero, the IRS will still send you the remaining amount of the credit, up to $1,400. In summary, you want the right to claim the child tax credit on your tax returns for 2018 and thereafter.
Below are a few tips and strategies you should be aware of when negotiating the child tax credit as part of your divorce or support settlement in Pennsylvania.
The child has to be under the age of 17 to qualify. Don’t bargain away some other concession to hold on to the Child Tax Credit for a child older than 17.
Remember that for single filers (as opposed to joint filers) the phase our begins at $200,000. If your gross income is above $270,000 you lose eligibility for the Child Tax Credit entirely. In the event that you do not qualify for the CTC because of your income, agreeing to allow the other party to claim the CTC may be a gesture of goodwill of little consequence to your bottom line.
Beware of the sunset. Remember, the 2017 Tax Cuts and Jobs Act sunsets in 2025. Therefore if you are getting divorced and you have children who will not be over the age of 17 in 2025, your settlement agreement should contemplate what happens if and when the TCJA sunsets. The goal is to cover all scenarios, so you are not forced to go back to Court in 2025 to resolve the issue.
You still need to claim the child as your “dependent” on your federal tax return. This is particularly important because the TCJA eliminated the tax benefits related to a dependency exemption. Therefore, the agreement or court order should give you the exclusive right to claim the child(ren) as your “dependents.” This almost means that you cannot file “single.”
The parties can share the benefit by rotating or splitting multiple children. By way of example, in a two-child family, the court order or agreement can provide language stating that Mother will always claim “Bobby” as her dependent for the purposes of the Child Tax Credit, and Father will always claim “Suzie”. In one-child families, the agreement can read that Father will claim the child in odd numbered tax years and Mother will claim the child in even-numbered tax years.
The Child Tax Credit may be transferrable. The Child Tax Credit has a residency qualification, in that the otherwise qualifying child must have lived with you for more than half of the year. In Pennsylvania Custody world, this means that the person claiming the child must have primary or at least shared physical custody. However, the IRS does permit the custodial parent to transfer the CTC to the noncustodial parent by filling out and submitted Form 8332. Click HERE to get a copy of Form 8332.
to the noncustodial parent by filling out and submitted Form 8332. Click HERE to get a copy of Form 8332.
For more information, see Publication 972, Child Tax Credit, available at IRS.gov
If you have questions regarding the Tax Cuts and Jobs Act or the Child Tax Credit, please contact our office at 610-275-0700 or info@highswartz.com. High Swartz family law attorneys have a thorough understanding how this law could affect your family.