The child tax credit was introduced in 1997 and made available to taxpayers in 1998. At that time, taxpayers who claimed the child tax credit were provided a nonrefundable credit for each child who was under 17 years old at the end of the calendar year. As a result of the 2018 Tax Reform Act:
- The child tax credit is now worth up to $2,000
- The 17 year old age requirement still exists
- The refundable portion of the credit is limited to $1,400, adjusted for inflation after 2018
- The earned income threshold for the refundable credit has been lowered to $2,500
- The beginning credit phaseout for the credit increases to $200,000 ($400,000 for joint filers)
- To claim the nonrefundable and refundable credit, the child must have a valid social security number and continue to meet the dependency rules as a child of the taxpayer
- The child tax credit is expected to expire on December 31, 2025
Impact on divorcing parties
In context to a divorce, only the parent who passes the child dependency tests can claim the child tax credit for each of their children. This translates into a new currency for personal divorces. Prior to the 2018 Tax Reform Act, divorcing parties considered the dependency exemption to be “golden currency”. Although it provided a little relief from a tax perspective the dependency exemption was reflected directly on Page 1 of the tax return and announced to anyone who looked at your tax return that these were your kids. This provided you a good feeling that you have the rights to claim the child dependency exemption on your tax return. Now that dependency exemptions are no longer available divorcing parties are focused on gaining the right to claim the child tax credit. Again, not a significant amount of money is involved. Yet, it is good to know your kids made it to your tax return and you, as the qualified taxpayer, will receive the child tax credit.
The child tax credit can be transferred to your ex-spouse
It is important to note that it is possible to transfer the child tax credit between parents. All you have to do is sign Form 8332 and you will be deemed to transfer this credit to your ex-spouse. Naturally, your ex-spouse will have to qualify for the dependency exemption tests too.
In context to your divorce decree you can indicate which years you would receive the credit verses your ex-spouse. The amount of income you make matters. In other words, if you make too much money you will not be eligible to take the child tax credit. As a result, you have to be careful if/when you decide to transfer the child tax credit to your ex-spouse. Why? Your ex-spouse may make too much money. If you transfer the child tax credit to your ex-spouse but your ex-spouse makes too much money then neither of you obtain the tax benefit.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.