The New Child Tax Credit Advance Refunds

Starting July 15, thousands of families in New Jersey will start receiving monthly Child Tax Credit Advance payments. When it comes to separated families with child support, things are about to get more complicated. What does it mean for you and your family?

WHAT IS THE CHILD TAX CREDIT ADVANCE?

As part of the American Rescue Plan of 2021, signed into law in March, many families with children under the age of 17 will receive periodic advance payments on the Child Tax Credit (CTC) of up to $300 per month per child. The child tax credit is a refundable income tax credit that helps offset the costs of raising children. The CTC was created to help alleviate financial burdens on lower- and middle-class families with minor children, such as finances for child care or afterschool programs.

WHO IS ELIGIBLE FOR THE TAX CREDIT ADVANCE?

A family’s eligibility for this monthly child tax credit advance payment can be determined by their annual household income level: those making less than $60,000 per year will qualify for up to 12 payments over the course of a calendar year (up to $300 each). This year, the credit will apply in full, even if there is no tax due. That means that, if there is no tax due, the credit will take the form of a direct payment from the government to the taxpayer. The credit phases out for higher incomes. For a head of household, the phase-out begins at $112,500 of income. For single or married filing separately, it begins at $75,000. For couples filing jointly, it begins at $150,000.

To determine eligibility for the credit, the IRS will use your clients’ 2020 federal tax returns. That return specifies the incomes of the parties, the Social Security numbers of dependent children, and which party is claiming the exemption for those children. This is enough information for the IRS to calculate the new Child Tax Credit. The child tax credit is unique in the sense that it provides substantial assistance to families with low and moderate incomes, as well as those at higher income levels.

IS THIS TAX CHANGE PERMANENT?

At present, no. The American Rescue Plan currently extends the CTC expansion for 2021 only. However, President Biden’s American Families Plan has proposed extending it through at least 2025. There is also support for making the CTC expansion permanent.

HOW DOES THE CREDIT IMPACT CHILD SUPPORT IN NEW JERSEY?

There are two ways in which the CTC expansion can impact child support. First, child support is based on who claims the children on their income tax return. Many people have child support based on the old tax exemptions that people received when they filed a tax return. When the exemption went away and more people qualified for a child tax credit, child support did become less fair in many cases. Now, not only is there a tax credit as opposed to an exemption to taxable income, but the tax credit has increased and is eligible to even more people. If you have a child support calculation based upon the old calculator, 2019 and before, you need to have your child support evaluated.

Second, only one parent is going to be receiving the new advance payment. If you claimed the child on your 2020 income tax return, you are the parent that will receive this new advance. Clearly, if you are not the residential custodial parent, or if you have an alternating schedule where the parents share the child tax credits/exemptions, then this may not be fair and equitable. There may need to be adjustments to child support to ensure these payments are properly directed towards the children, as that is the point of the CTC advance.

If you pay or receive child support, it is important that you contact our office to determine how these changes impact you. Make sure you are receiving the proper support for your children!