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2021 child tax credit and shared custody: What parents need to know

Which parent gets the monthly checks? Should parents who share custody of a dependent opt out of advance payments? We'll explain.

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Make sure you're not receiving advance payments of a credit you're not actually entitled to claim.

Sarah Tew/CNET

There are a lot of questions about this year's advance child tax credit for divorced, separated and unwed parents who share custody. The IRS has specific rules that are different from prior years, including which households qualify and how the payments are disbursed upfront in monthly installments. Since the rollout of payments began, the IRS has issued guidelines for families who might be concerned about eligibility or about owing the tax agency money in 2022.

The IRS determined who would start receiving the advance credit this year based on the dependents you claimed on your 2020 tax return (or 2019, whichever is the latest return on file). So if any of your household circumstances have changed since then, including a shift in primary custody or marital status, the tax agency is encouraging parents to unenroll from the advance monthly payments. The key to doing that is the Child Tax Credit Update Portal, which we'll explain below. 

If you decide to unenroll in order to relieve a potential tax headache next spring, you'll still get your child tax credit money, though it won't be in 2021 -- you'll have to wait until you file your tax return in 2022. We've summarized the key things parents with shared custody need. For more, here's what to know about child tax credit problems like delays and what to do if you're missing a payment. This story was updated with new information. 

Can divorced, separated or unwed parents both get a payment for the same dependent?

With the first two stimulus checks during the pandemic, parents who weren't married but shared joint custody of a child could each receive a payment for the same dependent if they had been alternating years claiming the child on their taxes. With the American Rescue Plan in March, Congress closed off that loophole for the third stimulus checks. 

Can parents who share custody of a child take advantage of a similar loophole with the 2021 child tax credit? The short answer is no. Only one parent can get the credit for a shared dependent. If you're the one who claimed the child on your latest 2020 tax return, then you'll be the one receiving the advance payments this year. If you incorrectly collect payments for a child this year, you may have to repay part or all of the up to $3,600 credit next year.

What should parents do if they alternate yearly custody of a dependent?

Even if parents have an arrangement to alternate custody of their dependent, the IRS won't know who has primary custody until your 2021 tax return is filed next spring. Let's say, for example, that you and a coparent switch between claiming a child in odd-numbered and even-numbered years. If you start receiving the advance child tax credit payments this year even though you won't actually be claiming the child on your 2021 return, then you are technically not entitled to that money. 

If this kind of arrangement applies to you, or if you haven't yet determined which parent will be claiming the dependent for 2021, the best option is to unenroll from the monthly payment program. 

Do parents with shared custody have to unenroll from advance monthly payments?

Because collecting the 2021 advance payments when you're not eligible could result in your having to pay back a portion or all of the credit to the IRS next year, the IRS is recommending that parents with complicated or unknown custody situations unenroll. (Note that if you do end up wrongly collecting the credit for a dependent, you might be excused from repaying the excess amount if you qualify for repayment protection.) 

If you know that you will be claiming a dependent on your 2021 tax return but the other parent doesn't unenroll, the IRS says that their decision will not affect your ability to claim the child tax credit. In other words, the other parent who incorrectly collected the advance payments this year could end up having to repay the IRS next year, but you'll still be able to claim the full amount of the credit for your child when you file your tax return next year. 

Since monthly payments have already started, can parents still enroll? 

So far this year, there have been two advance monthly child tax credit payments (July 15 and Aug. 13), with a third one on the way Sept. 15. Even if you've already received the first few payments, you can opt out anytime in 2021 to stop receiving the remaining monthly advances, as long as you meet the cutoff date. Though it's too late to make changes before the September check, you have until Oct. 4 to opt out of the October, November and December payments. For more on unenrollment deadlines, see here

If both parents are choosing to unenroll, they need to log on to the Child Tax Credit Update Portal separately. Each parent will need to have an individual account to manage their payments. If you don't have an IRS account already, you can create one through ID.me, an identity-verification process. Once you go to the Manage Advance Payments option in the portal, you'll be able to opt out of future payments. 

If you made a mistake by unenrolling, the IRS hasn't made it possible yet to reenroll. Parents who opted out early but would like to start collecting the advance payments again should be able to opt back in through the portal in late September 2021.

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Can child tax credit money be seized to pay overdue child support?

According to the IRS, advance child tax credit payments cannot be offset if you or your spouse owe past-due child support. Nor can the advance payments be reduced for overdue taxes from previous years or other debts that you might owe. However, if you end up receiving a refund in 2022 after filing your 2021 tax return, any remaining child tax credit amounts included in your refund could be used to offset other debt. 

For more, see the IRS page here

Is the child tax credit fully refundable?

Before the changes this year with the American Rescue Plan, eligible families could claim a tax credit for their qualifying children when they filed their taxes. The credit would reduce the amount of taxes they owed. That payment rule, however, excluded lower-income families who didn't owe federal taxes and wouldn't benefit from a tax saving with the credit. 

This year, the credit is "fully refundable," so qualifying families can receive the full dollar amount even if they don't owe income taxes. When tax credits are considered refundable, that means that if the amount of the credit is larger than the tax you owe, you'll receive a refund for the difference.

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About 36 million families across the US have started collecting advance payments for the enhanced credit.

Sarah Tew/CNET

What are the requirements for this year's child tax credit?

The 2021 child tax credit was temporarily expanded from $2,000 per child 16 years old and younger to $3,600 for children age 5 and younger and to $3,000 for children age 17 and younger. If you've got dependents between the ages of 18 and 24 who are enrolled in college full-time, you can receive $500 for each for them, though that money will come in tax season next year and won't be paid in advance. 

There are income limits and phase-out rules. If your adjusted gross income is $75,000 or less, single taxpayer parents will qualify for the full child tax credit amount, but that amount changes with incomes greater than $75,000. You can calculate your estimated total based on your family's income and ages of dependents using CNET's calculator

For more on the child tax credit, see our guide on 2021 babies and how to contact the IRS