The Child Tax Credit: What Couples Filing Separately Need to Know

8 minute read

Big news happened for families with minor children in 2021 on the tax credit front. Soon after the American Rescue Plan Act was passed, the IRS green lighted advance payments of the child tax credit to qualifying families. This provided tax relief for parents with children ages 17 and under, reducing how much they will owe on their federal income tax returns. Since its inception in 1997, this has been the year the child tax credit has brought the most relief to the most families. Still, many families have questions about how the child tax credit works in 2021.

Can Married Filing Separately Claim the Child Tax Credit?

As of July 15, 2021, parents across the country began seeing advance child tax credit payments come in. However, not every family is receiving equal payments. As with many tax incentives, the amount of credit you will receive is dependent on your filing status. Single individuals filing as head of household will begin to see a phase out of the credit when their income exceeds $112,500 for the year, while married filing jointly parents will see the phase out begin when joint income exceeds $150,000.

For instance, if a single dad with a daughter makes $120,000 a year, he will receive less from the child tax credit than a household with spouses filing jointly who have a daughter and $150,000 of income. If you’re married filing separately, the child tax credit amount qualify for is reduced from what you would receive if you had filed jointly.

Couples that are married filing separately receive a reduced credit that is equal to half of the typical credit amount. Currently, parents can receive up to $3,600 for every child under 6 and $3,000 for kids between 6 and 17. Married couples filing separately are only eligible for $1,800 and $1,500, respectively. This is because when married filing separately, only one parent can claim the child tax credit, not both.

Why Can’t Both Parents Claim the Increased Child Tax Credit?

The law states that only one parent can get the credit for a shared dependent. The parent who claimed the child on their 2020 tax return will bethe one receiving the advance payments this year, as the credit given in 2021 is based on 2020 returns.

If both parents claim the child tax credit, the IRS will only allow the claim for the parent that the child lived with the most during the year. While married couples who file jointly can claim dependents as a single entity, those filing separately must choose which parent will claim the dependent.

This is a challenge faced by divorced parents, particularly if there is hostility between the parents. The parent who has custody will get to claim the child as a dependent and receive the credit, but in cases where it’s a 50/50 split, the credit goes to the parent with the highest adjusted gross income.

Since the credit will automatically defer to the 2020 filing status, it can also cause issues with parents who have children moving between households this year. For example, if a child stayed with his dad last year, but this year he moved in with mom, dad will get it again in 2021 even though the son lives with his mom now.

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Income Phaseouts for the Child Tax Credit

The credit is based on modified adjusted gross income (MAGI). The credit decreases or phases out as income exceeds certain thresholds.

Specifically, the credit is reduced $50 for every $1,000 when your AGI goes above:

  • $200,000 if filing as single/head of household
  • $400,000 if married filing jointly
  • $200,000 if married filing separately

As you can see, married filing separately is not ideal when it comes to the child tax credit in 2021. You still may want to consider filing separately if you and your spouse owe unpaid taxes, because filing a joint return may result in the IRS offsetting your refund to pay the taxes. In addition, you may consider filing separately if your or your spouse have income-based student loan payments. This is because payments will be based on one spouse’s income rather than a couple’s combined income.

Another reason a couple might consider filing separately is if you’re concerned that your spouse isn’t being honest about their tax situation, especially if you’re going through a divorce. Also, if both spouses are high income earners, it might be better to file separately. Finally, another reason a couple might consider filing separately could be if they have many medical expenses.

Again, the main issue for couples filing separately for the child tax credit is that it limits the credit to half that of a joint return. Each couple should weigh the other factors in their tax return to determine the best option for them.

Child Tax Credit 2021 and Beyond

Under the American Rescue Plan, the IRS will disburse half of the credit in advance as monthly payments rather than lumping the full credit amount into taxpayer’s refunds during tax season. Before 2021, the credit was only available to individuals who reported AGI over $2,500, which caused some of the lowest income families to receive no credit. The Child Tax Credit today reaches even those who have no income and aren’t required to file tax returns at all.

It should be noted that if you didn’t qualify for the credit in 2020, you could be eligible now, and you should update your information in the Child Tax Credit Portal.

Advance Payments of the Child Tax Credit Have Already Started

The first advanced payments of the child tax credit began in July of 2021. Each month on the 15th, additional payments will come in. All that parents need is a bank account on file with the IRS, and payments should be automatically deposited into their account.

All indications are that the increased child tax credit will be made permanent, or at least extended through 2025. The Build Back Better plan could extend it for at least 2022. With this in mind, whether you’re filing jointly with your spouse or separately, the Child Tax Credit Portal is the place to reduce overpayments, to prove eligibility for the expanded credit and to update your marital status or bank account information.

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