The child tax credit (CTC), created in 1997, is a federal tax credit available to taxpayers with children. As with most tax laws, the CTC has been modified over the years. In 2021, the American Rescue Plan Act (ARPA) introduced the concept of “advance payments” of the CTC for the first time as one of many policy shifts aimed at easing the financial burdens of the COVID-19 pandemic. Taxpayers with children need to consider how the child tax credit impacts Indiana families, especially in light of the advance payments made in 2021.

The advance child tax credit provided $250 to $300 per month per child to income-eligible families from July through December 2021. Unless taxpayers opted out, the Internal Revenue Service (IRS) advanced half of the amount of the CTC, with the other half to be claimed by taxpayers when they file their 2021 income tax return.

A Look at How the Child Tax Credit Impacts Indiana Families

The introduction of an advance payment of the CTC also introduced a host of problems, as often happens when a new tax policy is implemented. The IRS is aware of these issues, which include coordination of the CTC between parents who are not married to each other, income fluctuations between the time the CTC was calculated and when a tax return was filed, incorrect mailings from the IRS giving out the wrong numbers for a taxpayer to rely on, and scammers taking advantage of a new and sometimes confusing program. The IRS published frequently asked questions in its Fact Sheet 2022-7, which does address some of the issues with the advance CTC.

If you have questions about how the child tax credit impacts Indiana families and taxpayers, an Indiana tax attorney who also practices family law may be best suited to answer your questions and help you navigate related legal issues.

Allocation of Advance Child Tax Credit Payments for Divorced Parents

In addition to splitting child custody time, divorced parents have to divide the financial obligations and benefits of their children as well, including which parent claims a child as a tax deduction. The advance CTC payments made during 2021 were made to the parent who applied the child tax credit on their 2020 tax return. For Indiana parents who alternate the CTC, the advance payments therefore went to the wrong parent.

If the advance payment went to the wrong parent, the parent who should have received the payment bears the burden of seeking repayment from the parent who erroneously received the advance CTC. Depending on the parents’ relationship, this may lead to litigation to obtain repayment. When it comes to issues with advance child tax credit payments in 2021, divorced parents may need to consult with an Indiana tax attorney who also works in family law and can help them navigate these issues.

Advance Child Tax Credit Calculation Impacted by Income Fluctuation

Both divorced and married parents may be surprised to learn that they have a tax liability for 2021 as a result of receiving advance payments. The advance CTC was calculated based on income data the IRS had from prior years’ filings. If a parent’s income rose significantly in 2021, or if the number of dependent children changed, a parent taxpayer may find themselves in a position of owing money to the IRS for overpayments of the advance CTC. Some taxpayers chose to avoid this risk altogether by opting out of the advance CTC payments and waiting to claim the credit when they filed their 2021 tax return.

Confusion Over the Amount of the Advance Payment

Another issue that has arisen with the advance payments has been confusion over the amounts involved for some taxpayers. In or about January 2021, the IRS was scheduled to mail Letter 6419 to affected taxpayers. According to the IRS, for the majority of taxpayers, the advance payment total listed in Letter 6419 would match the total on their IRS online account. The IRS acknowledged, however, that the amount in the Letter might be wrong in certain cases, including individuals who had moved or changed bank accounts in December. The IRS encourages taxpayers to cross-check the amount listed in their Letter 6419 using the CTC Update Portal and online account on the IRS website.

Scammers Taking Advantage of Taxpayers Receiving the Advance CTC

Not unique to the advance child tax credit, scammers are preying on people who have received the credit in an attempt to cause confusion over a new tax program. Scammers are directly contacting taxpayers under the pretense of being IRS representatives and attempting to get personally identifiable information out of the taxpayer to resolve purported issues with their advance payments. The IRS has issued reminders that it will not call, text, email, or message a taxpayer about a child tax credit and that, if a taxpayer receives such an unsolicited message, it is a scam and should be reported to the Federal Trade Commission (FTC) and the IRS.

Discuss How the Child Tax Credit Impacts Indiana Families with Your Indiana Tax Attorney

If you are impacted by problems resulting from advance payments of the child tax credit, or you want to better understand how the child tax credit impacts Indiana families, you will benefit from consulting with an Indiana tax attorney who is knowledgeable in child tax credit problems and solutions. Before filing your taxes for the 2021 tax year in 2022—and when planning ahead for your 2022 financial decisions— it is important to contact an experienced Indiana tax attorney like Julie A. Camden at Camden & Meridew, P.C., whose practice includes family law as well, which can be especially beneficial in cases of child tax credit payments for divorced parents and Indiana parents who alternate the CTC. You can reach Julie by calling 317-770-0000 or completing our online contact form.