As Covid stimulus payments are hitting bank accounts, divorced couples are fighting over whether the payments attributed to the children should be divided and if so, how. Unfortunately, these are uncharted waters and there is very little guidance from the courts or the IRS on how to address the problem.
WHAT WE KNOW
Through the American Rescue Plan Act, the IRS is depositing payments into the account identified on the taxpayers’ most recent tax return, which is 2019 for most filers. If the couple has divorced in the last year, this means one parent may be receiving the payment for the entire family, including their former spouse.
OK…SO WHAT NOW?
If a parent receives the payment for their former spouse, obviously, they should forward what is owed to that person. The question of how to handle the payments for dependents is more complicated, primarily because many divorce settlements divide or alternate the dependency exemptions
In more than 50% of divorces, the parties share equal parenting time and in most of the cases, the parties alternate the right to claim the dependency exemptions each year, with one parent claiming the children in odd-numbered tax years and the other parent claiming the children in even-numbered tax years.
Since the stimulus payments are based on 2019 tax returns, the parent who claims the exemption in odd-numbered tax years will receive the payments. In this scenario, a strong argument can be made that that the stimulus payment for the children should be equally divided and some Michigan courts have issued opinions ordering the payment to be divided.
Another problematic scenario is if a couple divorced after filing their 2019 taxes and one parent has primary custody and the right to claim the exemptions, but the payment was sent to their former spouse because that person kept the bank account tied to the 2019 tax return. Most would argue the parent with primary custody should be awarded the entire child related payment.
The main difficulty in most of these scenarios is the amount of the stimulus is not even sufficient to cover the cost of an attorney and many people are not able to navigate the court system alone. The good news is that if you were divorced or are divorcing in Michigan, there is a free online DIY form to create a Motion for Payment of Covid-19 Stimulus Check that you can print and file with the court.
WHAT ABOUT THE CHILD TAX CREDIT?
The latest stimulus bill creates an even larger problem for people who qualify for the child tax credit. The tax credit was increased to $3,000 per child from ages 6through 17; and $3,600 for children under age 6 for 2021, meaning the stakes are higher for parents who can claim the children in odd-numbered years. This is further complicated because the law allows for prepayment of one-half the child tax credit to take place during 2021, but the prepayments will be made to parents based on their 2020 tax filings. This means the wrong parent will receive the pre-payment, which will not only lead to disputes over who should rightfully receive the payment during 2021, but will also impact their tax filings in 2022.
If you qualify for a child tax credit and divide or alternate the dependency exemptions with your former spouse, the amount of the tax credit may be large enough to warrant retaining an attorney to make sure you receive the money you deserve.
Additionally, the Covid-19 StimulusPackage legislation requires theIRS to develop an online portal to help administer the advanced payments for the child tax credit. Parents should be able to update their tax information and specify who should receive the advanced payments, avoiding future headaches.
WHAT YOU CAN DO
While these issues are unique to the pandemic and could not have been anticipated by anyone, it illustrates why it is important to have the counsel of an experienced divorce attorney and/or to complete your divorce through Collaborative divorce, where you can maintain a civil co-parenting relationship. For couples whose divorce has been finalized, the grey area created by the stimulus may necessitate amending their separation agreements.
If you have had or are going through a divorce that is amicable, open communication with your former spouse is key. The stress of the pandemic has brought many otherwise reasonable people to their breaking points; it can be easy to lose your cool over additional financial uncertainty. Framing the discussion around your common goal, the well-being of your children, will enable you to approach as allies, not adversaries.