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American Rescue Plan Act of 2021

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American Rescue Plan Act of 2021

The American Rescue Plan Act of 2021 was signed into law on March 11, 2021. This economic stimulus bill was passed to counteract the negative health and economic effects of the COVID-19 pandemic and built upon previous legislation meant to do the same.

The bills key features include:

  • Extending expanded unemployment benefits through September 6, 2021
  • $1,400 direct payments to individuals, including eligible adult dependents (college students, SSI recipients, SSDI recipients). These benefits begin to phase out according to the following income schedule:
    • 75,000 for individuals, with no payment going to those earning more than $80,000
    • $112,500 for single parents, with no payment going to those earning more than $120,000
    • $150,000 for couples, with no payment going to those earning more than $160,000
  • Expanded tax credits for the 2021 year, including the child tax credit, child and dependent care credit, and the earned income tax credit
  • Small business grants
  • Funding for education, housing, COVID-19 healthcare, agriculture, transportation, and cybersecurity
  • Changes to ACA, COBRA, Medicaid and CHIP

While the passage of the American Rescue Plan Act may have brought some relief to families across the country, it also brings with it many questions if you are going through or have been through a divorce. How do these tax credits affect your family? What about the stimulus checks? We’ve compiled answers to your most pressing questions so you can understand how this may affect you and your family. If you have any other questions, reach out to us today and schedule a consultation with one of our attorneys. We always recommend speaking with a tax professional or your financial advisor if you have questions regarding your tax situation.

 

Q&A 

A. For people who filed jointly in 2019 and have not yet filed their 2020 taxes, the stimulus will go to the joint bank account they used for their 2019 taxes. If a direct deposit cannot be completed, it will be mailed to the address on the most recent tax return. If you filed separately and have not yet filed for 2020, the person who claimed the dependent children in 2019 will receive the stimulus payment. If one person has filed and claimed the child, the first person to file taxes will receive the stimulus.

A. There is a process to appeal:

  1. Send docs to IRS
  2. Once the IRS has received your documents, they will examine both returns – the return with the claimed dependent(s) and yours – and apply the tiebreaker rules based on the criteria listed below. The process might take 8-12 weeks.
  3. If you found out that you claimed a dependent incorrectly on an IRS-accepted tax return, you will need to file a tax amendment or form 1040-X and remove the dependent from your tax return.
  4. Tiebreaker rules:
    i. A married couple or parents prepare and e-file or file a married joint tax return and claim the child a qualifying dependent.
    ii. Only one parent of the couple, who is also the child’s parent, claims the child as a qualifying child or dependent.
    iii. If the child has two persons as parents and the two persons do NOT file a married joint return, then the parent with whom the child lived or resided for the longer time period during a tax year will be qualified to claim.
    iv. If the child lived or resided with each parent the same amount of time during the tax year, the parent with the highest adjusted gross income or AGI will be able to claim. No married joint return, both parents claim the child on their respective return.
    v. If no parent claims the child as a qualifying child, then the person with the highest AGI qualifies over any parent who may have been able to claim the child, such as a qualifying step-parent or relative.
    vi. Because of the second tiebreaker rule (residence), the parent who has legal custody of a child is generally the parent who gets to claim the child in cases of divorced or separated parents. If you are the custodial parent and you wish to relinquish your dependency exemption and assign it to the non-custodial parent, you may do so by filing Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.

A. Per the IRS, the payment is not income and not taxable. From a practical perspective, the amount is unlikely to make a significant difference in the calculation of child support or maintenance.

A. Keep in mind, an accepted tax return is not a guarantee to also have the right to claim the dependents on that return. If your ex erroneously claimed your child as a dependent, the Internal Revenue Code allows them to amend their tax return within three years of filing the original or within two years of paying the relevant tax, whichever is later. However, eliminating the dependent generally increases their taxable income and may require them to pay additional tax for that year. Although penalties may apply to the underpayment, the IRS can waive them if they can convince them that it was an unintentional error.

If they choose not to amend their tax return, they run the risk of the IRS discovering that the same child is being claimed as a dependent on two returns. The IRS has three years from the time they file the original return to perform an examination and make additional assessments. In the event they are chosen for an audit, the agency is likely to require proof that your child either lives with them or that they have your consent.

There is the possibility that the IRS will not discover the error within the three-year period. However, if they claim a dependent with full knowledge that they do not qualify, the IRS may argue that it has an unlimited amount of time to examine their return since they made a willful attempt to evade income tax.

A. This depends on what agreements are made or if there are any temporary orders in place. If you were married on the last day of 2020, you have to file as married jointly or married filing separately. Whether these payments should be split depends on the unique circumstances of the parties. We recommend you reach out to speak with one of our attorneys if you have any questions.

Miscellaneous Other Child Tax Credit Information:

  • You have to file a tax return to get this credit, even if you don’t owe tax and are not legally obligated to file a return.
  • This tax credit is refundable. So, if you’re due to receive a credit of $5,000 but you owe only $2,000 in taxes, you might get a check for $3,000.
  • For the 2020 tax year, there are special rules due to coronavirus: You can use either your 2019 income or your 2020 income to calculate your tax credit, and you can use whichever number gets you the bigger tax credit. Be sure to ask your tax preparer to run the numbers both ways.
  • A number of states offer some version of an earned income tax credit for working families, so you might be able to get that credit too.