How the New Stimulus Package Benefits Divorced Families

May 11, 2021

As you have likely heard by now, the $1.9 trillion American Rescue Plan Act is now enacted. The package expands relief provisions first introduced in the Coronavirus Aid, Relief and Economic Security (CARES) Act and creates new measures to provide relief to the American people. In this piece, we will specifically focus on how this could affect your loved one who may be divorced or going through a divorce.

The most important thing to know is that even if someone you know did not qualify in the past, they may now. So, it is highly recommended that they ask their tax preparer about their specific eligibility and keep these changes top of mind.

The first question to answer is which parent qualifies to claim the children. For divorced parents that alternate years they claim their dependents, it is important to note that the government will use the last tax return on file to determine who will receive the stimulus check(s) as well as if a taxpayer qualifies to receive any of the credits detailed below.

Stimulus Checks 

  • This new round of stimulus checks is up to $1,400 per eligible individual with income phaseout thresholds starting at $75,000 for single filers and $112,500 for head of household filers.

  • Eligibility this cycle has been expanded for dependents. Dependents previously referred to children ages 17 and under; however, this Act includes all dependents in the household, which can include older children who are still in school (like college-age kids).
  • Checks will be based on income from the most recent tax return. So, if the 2020 return was already filed, it will be based on income from 2020. If not, then it will be based on 2019 income.

It is crucial for families who did not qualify for previous stimulus checks to consider whether they now qualify. This is especially relevant for recently divorced couples since support payments are not taxable in divorces finalized in 2019 or after. It is common for taxable income to be significantly less than previous tax years filing as a married couple.

If taxpayers are within the income thresholds indicated, the total amount of a household’s stimulus check payment is calculated by multiplying $1,400 times the total number of eligible individuals in the household. 

Child Tax Credit

Only for the 2021 tax year, the child tax credit is increased from $2,000 to $3,600 for every child under age six and to $3,000 for children between the ages of 6 and 17 (one year older than under current law).

The total child tax credit is now divided into two parts, where the original $2,000 credit is subject to a phaseout of $200,000 for single and head of household filers. However, the increased credit amount will be subject to a lower income threshold level of $75,000 for single and separate filers and $112,500 head of household filers. This means that a single filer that makes $100,000 would be eligible for the original $2,000 credit, but not the new increased amount.

Another important change to the child tax credit is that parents will receive it regardless of their employment status, and the credit is fully refundable. For example, a parent with low taxable income (even if they have high non-taxable spousal and child support) could potentially receive a refund of the full child tax credit amount. This means divorcing parents should be mindful about negotiating who claims the children if the higher income parent would otherwise be phased out of receiving the credit.

Half of the credit can be received in advance by having the IRS send monthly payments to families from July through December 2021. This amounts to a monthly tax credit of $300 per month for every child under six and $250 for every child six and over. These extra payments can greatly ease childcare payments for parents who have lost their jobs or have had to leave the workforce to care for their children due to the pandemic.

Child and Dependent Care Tax Credit

Taxpayers can use the child and dependent care tax credit if they paid expenses for the care of a qualifying individual to enable them to work or actively look for work. A qualifying individual is a child who is under the age of 13 for the entire year. It can also include a spouse or other dependents who are physically or mentally incapable of caring for themselves, provided those individuals live with the taxpayer for more than half of the year.

For 2021, the Act will increase the credit to $8,000 of eligible expenses for one child or $16,000 for two or more children.

Lastly, for 2021, the limit on tax-free employer-provided dependent care assistance is increased to $10,500 (50% for married taxpayers filing separately).

It is important to note that for high earners (those whose adjusted gross income exceeds $440,000), the child and dependent care tax credit will no longer be available despite having been eligible for at least some credit amount in prior years. This is due to the phaseout starting point of $400,000 for all filing statuses.

*Many of the changes above are temporary for 2021, but it is possible they may be included in comprehensive tax reform later in 2021. With managing finances in divorce already being a complex topic (on top of a global pandemic!), it’s important for divorced spouses to communicate with each other, their attorneys, and their CPAs to keep the interests of their children as the top priority while minimizing the overall family tax bill.

Please email if your loved one would benefit from additional information and resources from our Divorce Practice Group.