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Stimulus and Child Tax Credit Payments

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As of June 1, 2021, the Government has issued three rounds of economic stimulus payments related to the COVID-19 pandemic.  Additionally, starting next month (July 2021), millions of parents across the country will also begin receiving monthly child tax credit payments.

As a result, many of our clients have been naturally asking how stimulus and child tax credit payments will be allocated by the Family Court.  To answer this question, let’s take a deep dive into each round of stimulus benefits.

Have Questions About How Stimulus and Child Tax Credit is Handled in a Divorce? Get Immediate Help from Our Arizona Family Law Attorneys.

Or, Continue Reading Below About What You Need to Know Regarding Stimulus Checks and How They are Handled. 

Let’s Look at Stimulus Check (Round One)

The first round of COVID-19 related stimulus payments were issued in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (a.k.a. CARES) Act.  The maximum benefit for this round of stimulus checks was $1,200 per single filer, or $2,400 for joint filers, plus $500 for each qualifying child. Eligibility for this round of stimulus checks was based on Adjusted Gross Income (AGI). Single filers with an AGI below $75,000 earned the maximum benefit, whereas joint filers with an AGI below $150,000 earned the maximum benefit. Head of Household filers with an AGI below $112,500 also earned the full benefit.

After each respective AGI threshold, the benefit phased out at a rate of $5 for every $100 earned above the AGI threshold. As such, single, joint, and head of household filers no longer qualified for any benefit at all if they earned AGIs of $99,000, $198,000, $136,500, or more, respectively.

For this round of stimulus checks, a qualifying child was defined as:

  • Related to the filer by blood, marriage, or adoption;
  • Under the age of 17;
  • Receiving at least one-half (50%) of their financial support from the filer;
  • Living with the filer for at least one-half (50%) of the year;
  • A U.S. Citizen, U.S. National, or U.S. Resident Alien.

Next, the Stimulus Check (Round Two)

The second round of pandemic-related stimulus checks were issued in early 2021 under the Consolidated Appropriations Act.  Unlike the prior round, the maximum benefit for this round of stimulus checks was only $600 per single filer or $1,200 for joint filers, but the plus-up for each qualifying child increased to $600. Eligibility for this round of stimulus checks was also based on AGI. Single filers with an AGI below $75,000 still earned the maximum benefit and joint filers with an AGI below $150,000 also still earned the maximum benefit.

Head of Household filers with an AGI below $112,500 also still earned the full benefit.  After each respective AGI threshold, the benefit still phased out at a rate of $5 for every $100 earned above the AGI threshold.

As such, single, joint, and head of household filers no longer qualified for any benefit at all if they earned AGIs of $87,000, $174,000, $124,500, or more, respectively.  There was no change to the definition of a qualifying child between this and the first round of stimulus checks. However, the upper phase-out limits were increased by $10,000 per qualifying child for this round.

Finally, the Stimulus Check (Round Three)

The third and most recent round of stimulus payments was established in the American Rescue Plan Act (ARPA) and issued towards the end of the first quarter in 2021.  For this round, eligible individuals received $1,400 ($2,800 for joint filers) and an additional $1,400 per qualifying dependent.  As with the prior two rounds, eligibility for this round was also based on AGI with no change in the maximum benefit threshold for single, joint, and head of household filers ($75,000, $150,000, and $112,500, respectively).

This round had the most aggressive phase-out schedule, with a benefit reduction rate of $28 for every $100 earned above the AGI threshold, meaning that single filers earned no benefit at $80,000, joint filers earned no benefit at $160,000, and head of household filers earned no benefit at $120,000.

Importantly, the definition of a qualifying child was changed in this round to include dependents over the age of 17, thus opening the door for millions of college students and older adults with disabilities to qualify.

Federal Child Tax Credit (2021)

In addition to the third round of stimulus checks, the ARPA also expanded the Child Tax Credit (CTC) for the 2021 tax year.  Under the expanded advance credit, filers claiming the CTC will receive $3,600 per qualifying child under the age of 6 and $3,000 per qualifying child between the ages of 6 and 17.  For comparison, before the ARPA was enacted, the credit per child was only $2,000.

Another important change under ARPA is that one-half (50%) of the CTC will now be paid out as an advance credit. This means that commencing July 2021, qualifying filers will begin receiving monthly payments directly from the IRS equal to the total CTC they are eligible to receive, divided by 12. These monthly payments will continue through the end of 2021. Like the first three rounds of stimulus payments, the CTC is also subject to AGI limits.

To qualify for the maximum benefit, single filers must have an AGI below $75,000, joint filers must have an AGI below $150,000, and head of household filers must have an AGI below $112,500.

From there the benefits decrease by $0.05 for ever $1 above the threshold.

Each of the above payments has multiple component parts.  For example, each round of stimulus payments is comprised of a benefit to the filer(s), whether single, joint, or head of household, but also includes a potential additional benefit based upon the number of qualifying dependents claimed by the filer. Even the Child Tax Credit has two component parts; payment for children under 6, and a different payment for children between the ages of 6 and 17.

In general, however, all of the above payments can be easily distinguished by whether the benefit is tied to a dependent. This distinction is important because Arizona Family Courts will treat stimulus payments and credits tied to a qualifying child differently than stimulus payments owed to the individual parent (with or without a qualifying child).

Individual Stimulus Benefits

Each of the first three rounds of COVID-19 related stimulus checks has an individual benefit.  For example, a single filer with an AGI of $50,000 per year should have received a total of $3,200 (=$1,200 [Round 1] + $600 [Round 2] + $1,400 [Round 3]) over three stimulus checks. In contrast, a joint filer with an AGI of $80,000 per year should have received $6,400 — double the amount — or $3,200 for each of the two individuals that filed jointly.

In a divorce where both parties file and qualify separately, there would be no issue because each party would receive equal but separate stimulus payments.  However, what happens if during the divorce, the parties file jointly and one spouse receives the full benefit? Because the non-child-related portion of the benefit is easily traceable to the individual spouses, there is no question that each spouse should receive one-half of the check. Even if your spouse swipes 100% of the money and doesn’t reimburse you your one-half, the story does not end there. You should still make a claim for your portion of the payment in settlement negotiations or at trial.

The best thing you can do to protect yourself and minimize the cost associated with litigating the issue in court is to secure an agreement in writing detailing what should happen with the money (i.e., it should be split equally).

You should also consider including language in your Decree (final orders) providing for an equal division of any future stimulus payments resulting from tax years during the marriage.  If the pandemic has taught us one thing, it has taught us that things change. Just because there have only been three stimulus payments so far does not mean that there will not be more payments in the future.

By including provisions addressing future payments, you are ensuring that your bases are covered no matter what happens.  At best, the additional provisions net you additional stimulus money without the hassle of a legal battle.  At worst, the additional provisions never trigger because there are no further stimulus payments, meaning that your attorney spent an extra three minutes drafting your Decree for no reason (in hindsight).

What about Family Law and Tax-Related Issues?

What if you are a high net income earner and your spouse is not?  If you are filing 2020 taxes while your divorce proceeding is pending and you are a high-income earner, you should consider consulting an accountant. It could be that you would qualify for stimulus benefits by filing jointly whereas you would not qualify by filing as single or head of household.  For example, if your AGI is $130,000 and your spouse does not work, if you file as single or head of household, you would not qualify for the third stimulus check.

However, if you can convince your spouse to file jointly, you would qualify for the full benefit, thereby affording each of you an additional $1,400 and a potentially lower tax bracket to boot.

Child-Related Stimulus Payments & Credits

Almost all Arizona child support orders contain provisions regarding the allocation of tax benefits associated with minor children. The Arizona Child Support Guidelines (Guidelines) recognize that potential tax benefits related to minor children may exist under federal and state tax laws.  Prior to the Tax Cuts and Jobs Act, parents were entitled to claim minor children as personal exemptions, but the Act did away with such exemptions through the tax year 2025, instead allowing parents to claim certain child tax credits.

As a result, the Guidelines have been updated to specifically include tax credits within the umbrella of “tax benefits” subject to allocation by the Court.

By default, unless the parents agree otherwise, the Guidelines assign such benefits in proportion to each parent’s respective share of the parents’ total combined child support income.

For example, if Parent A earns a child support income of $80,000 and Parent B earns a child support income of $20,000, then Parent A will be assigned 80% of the tax benefit and Parent B will be assigned 20% of the tax benefit. Traditionally, the assignment of tax benefits is achieved by allocating all of the benefits for a child within a single tax year.  Thus, using the same example, an 80% allocation of the benefit to Parent A and a 20%  allocation of the benefit to Parent B results in Parent A claiming the child four out of every five years (4/5 = 80%) and Parent B claiming the child one out of every five years (1/5 = 20%).

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The default rules for the allocation of child tax benefits under the Guidelines are important to the question at hand because they provide key insight into the Court’s thought process on the issue.  After all, both the qualified child portions of the stimulus payments and the CTC payments are ultimately tax benefits for the Child. Context matters because, as with most things COVID-19, the rules do not specifically address how pandemic-related stimulus payments and tax credit increases should be handled.

In a similar vein, because the issue of child-related stimulus payments and advance tax credit payments is novel, Arizona Appellate courts have not yet heard a case issuing clear guidance as to how such payments should be allocated.  As such, it is important to recognize and understand that this topic is being actively debated and argued between Arizona family law attorneys.

Below are some of the prevailing viewpoints.

The Importance of Following Existing Orders

An argument can be made that the benefits should be awarded to whichever parent is entitled to claim the corresponding children under the existing order for the year in question.  In other words, if a parent’s existing child support order authorizes the parent to claim a child in 2020 and that parent receives an additional tax benefit as a result, that is that.

The obvious problems with this argument are that all of the pandemic-related stimulus payments and tax credit increases are temporary in nature and were likely unforeseeable when the existing orders were entered.  Should one parent receive a windfall benefit just because it arbitrarily happens to be that parent’s year to claim the child?

Proportionality of Parenting Time / Child Custody

Another argument can be made that since the purpose of the child-related stimulus payments and tax credits is to support the child financially, the payments and credits should be divided based on the allocation of parenting time.

For example, if the parents share equal parenting time, they would similarly split the stimulus payments and advance tax credits equally.  This argument certainly has emotional appeal, and an experienced child custody attorney could bring it to life by making creative arguments regarding the interplay and hierarchy between federal (e.g. IRS) and state (e.g. Arizona Child Support Guidelines) law.  However, the weakness of this argument is that the Guidelines clearly favor an allocation based on proportionality of income.

Proportionality of Income (Modified)

As stated above, Arizona law clearly establishes that child-related tax benefits should be allocated in proportion to income.  Traditionally, this is achieved by dividing tax years between the parents.  When the tax code is uniform and consistent, this makes sense because each parent will presumably have access to the same or similar benefits from year to year.

Because the stimulus payments and Child Tax Credit are temporary, allocating the benefit by tax year is unfair because the benefit will not be available for the other parent to claim in future years.

As such, a strong argument can be made that the spirit of the Guidelines’ objective, which is to allocate tax benefits (including child tax credits) proportionally based on income, can be better achieved in this instance by splitting each payment as it is made.  Under this scenario, using the same example incomes as before, Parent A would receive 80% of any child stimulus or tax credit payments and Parent B would receive 20%.

Much like the default rule, this may seem counter-intuitive to some people (why should the higher earner get more?), but it has the distinct advantage of mirroring the same guiding principles spotlighted by the Guidelines.

As an evolving an unresolved area of law, the issue of how pandemic-related child stimulus and tax credit payments should be distributed between parents is ripe for creative lawyering, tailored to achieve a client’s specific needs and objectives.

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