Recent changes to the federal tax laws will be of great interest to Colorado couples in the process of divorce, or Colorado parents with divorce or parentage agreements or orders.
The New Federal Child Tax Credit Law
If you claimed a child as a dependent on your 2002 income tax return and that child was born after 1986, you or your spouse or co-parent may soon receive a check from the Internal Revenue Service in the amount of $400, representing an advance payment on a recent increase to the 2003 child tax credit.
The newly enacted “Jobs and Growth Tax Relief and Reconciliation Act of 2003” raised the child tax credit from a maximum of $600 per child to $1,000 per child. One immediate impact of this legislation is that many parents will receive as much as a $400 advance this summer on their 2003 child tax credit (a credit that would ordinarily be applied and with monies potentially received, only after filing of their 2003 tax return).
The child tax credit is applied as a credit against your total taxes owed. In order to qualify for the credit a “qualifying” child must be:
Under the age of 17 (for the entire year)
Claimed as the taxpayer’s dependent (i.e., the dependency exemption and the child tax credit must be claimed by the same parent; see further details below)
Tthe taxpayer’s child, stepchild, grandchild or other qualifying category.
Note that a parent’s right to claim the dependency exemption (and thus, this “linked” child tax credit) is typically governed by the parties’ agreement or court order, and not automatically granted to the parent with head of household filing status for that child. Colorado divorce and parentage laws consider a parent’s right to claim the dependency exemption (and this credit) an issue to be equitably apportioned — a benefit in the nature of child support.
Parent Income Limitations
In addition to these requirements, the income level for the parent claiming the credit must not be “too low” or “too high.”
Specifically, the child tax credit currently phases out for taxpaying parents with modified adjusted gross incomes above:
$110,000 if married, filing jointly or $55,000 if married, filing separately
$75,000 for all others (this being the phase out level generally at issue in divorce or post-divorce mediation)
The Child Tax Credit is nonrefundable (it merely offsets taxes otherwise owing on household returns). A second Additional Child Tax Credit (a refundable credit directly payable to lower income parents who receive less than the full amount of the Child Tax Credit) is presently limited to 10% of family income greater than $10,500.
However, both the upper and lower limits of income to qualify for these child tax credits (and thus this advance payment) are currently under debate by Congress. Proposed legislation would raise the refundable child tax credit to 15% of present low income levels (allowing more tax cash to lower income households). As of Sept. 1, 2003, however, it appears this amending legislation will not be enacted. Be sure to check back with our website’s The Latest! (Colorado divorce law information and mediation news) for further developments, if any.
Which Parent Is Mailed The Check?
The IRS will rely solely upon information contained in filed 2002 income tax returns to determine who is eligible to receive the
2003 advance payment of $400. As a result, the parent who claimed the dependent exemption and the child tax credit on his or her 2002 return is the parent who will receive the new advance child tax credit check from the IRS, and this is so, even if that parent is not entitled by the parties’ agreements or court orders to claim the child in 2003!
If you divorced in the calendar year 2003, but filed joint 2002 tax returns, your check will be made out to your and your spouse jointly, and will be sent to the address listed on your 2002 return.
Potential Conflict And Problem Area For Divorced Parents
If this issue has not been discussed and resolved, and the parent who is entitled by the parties’ agreements or court orders then claims the child tax benefits in 2003, a potential “double claim” problem arises. The parent entitled to the child tax benefits in 2002 has already received a portion of the child tax credit benefits owing to the other parent entitled to them in 2003.
Exactly how the IRS will handle such conflicts is not yet certain, but the need to clearly and precisely determine these issues to save both parents the time, stress and expense of sorting all this out later is apparent. For many Colorado couples, mediation will be a cost-efficient process to resolve such possible problems.
When Will Checks Arrive?
The IRS advises taxpaying parents to look for the refund in their mailbox in late July or early August of 2003!
Divorce Mediation And Tax Issues
Several of our Colorado clients at Divorce Resolutions®, LLC have already addressed in their work together in mediation how to fairly divide this advance of the child tax credit. These and other tax issues are entirely appropriate for and usually efficiently managed during mediation of your divorce, or in “tune-up” of your earlier divorce or paternity agreements or court orders. In the collaborative work with a neutral family mediator, these valuable new tax benefits can be considered in the context of all other financial issues in your Colorado divorce or parentage case.
This information is only an overview of this change in federal tax law. More details can be found at the website of the Internal Revenue Service and its articles on this child tax credit advance.
All divorce-related tax issues are dependent on your family’s unique circumstances and should be carefully considered with a Colorado tax advisor or other divorce professional. (Please see the materials at the disclaimer link below.)
Also, see our other feature articles, where we discuss in detail other Colorado legal, procedural (including divorce law and family mediation) or parenting topics. Presently, we look in depth at: