COVID Relief Bill’s Child Tax Credit Presents Unique Opportunities in Divorce

The ink on President Biden’s signature is barely dry on the recently-enacted $1.9 trillion COVID relief bill (known formally as the “American Rescue Plan Act of 2021”) (the “Act”), but many  family law practitioners are already thinking of how to use it to their clients’ advantage. One advantageous opportunity that is sure to come up over the next year is through the newly-amended child tax credit in the tax code. Currently, taxpayers can claim a partially-refundable child tax credit up to $2,000 per child under age 17. Now, subject to certain income requirements, taxpayers would be able to claim a refundable tax credit up to $3,600 per child under age 6 and $3,000 per child from ages 6 to 17. Not only is this a dollar-for-dollar credit (unlike deductions) of up to $1,600 more per child, but it is also fully refundable. This is an often misunderstood but powerful mechanism by which the government gives money back to the taxpayer, even if the taxpayer has no tax liability. It is particularly robust for lower income taxpayers who might not owe any tax at the end of the year – instead of the credit evaporating into the ether, now it is money in their pockets. Unfortunately, it’s not all gumballs and lollipops as the bill lowers the adjusted gross income  cap (as to who can take advantage of the credit) to $75,000 for single filers and $150,000 for joint filers (down from $200,000 and $400,000 respectively).

The change in the tax code for this year may allow the astute attorney the ability to gain advantage in child support negotiations and litigation. Pa.R.C.P. No. 1910.16-2(f) gives the trier-of-fact in a support case the ability to award the child tax credit to the payor or payee, in a manner that would maximize the total income available for support. It even gives them the power to order execution of the required IRS documents to facilitate said credit shifting. As such, the Act may give a child support payor grounds to renegotiate or relitigate which party gets the child tax credit. Given the relatively low cap on income regarding who can claim the credit, it is likely that the more creative a lawyer can get in negotiating, the better it will be for the clients.

By all accounts, this new credit and the refundability of it will expire after just one year of effect. However, for this year at least, the extra money can and should be considered in the pot for negotiating equitable distribution. The advocating attorney can use this as leverage for a long-term deal, with only giving up a small amount of short-term gain. If a client gives up the $1,000 difference per child for only one year, and the opposing party thinks they are getting it for 10 years, that could be a $20k or $30k difference in the mind of the person with whom you are negotiating. Clever counsel would keep this information and strategy close to the vest.

If you have any questions regarding any Family Law matters, please contact Michael R. Chilcot, Jr. who is an Associate in Leech Tishman’s Litigation & Alternative Dispute Resolution Practice Group, focusing on Family Law. Mike is based in the firm’s State College, PA office. Mike can be reached at 814.954.5904 or mchilcot@leechtishman.com.

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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in business restructuring & insolvency, corporate matters, employment & labor, estates & trusts, intellectual property, litigation & alternative dispute resolution, and real estate. In addition, the firm offers a wide range of legal services to clients in the aviation & aerospace, cannabis, construction, energy & natural resources, healthcare, and hospitality industries. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York, Philadelphia, Sarasota and Wilmington, DE.