There is hope that the plague is behind us. Pestilence is on the way either in the form of a lantern fly or the return of the cicada after 17 years of peace. Another crisis arises for the divorce attorney and his criminal friend, the accountant. It’s the war for the children’s tax credits. Chances are that the lawyers and accountants are the real winners, as in many cases the battle will consume the controversial dollars.
Once upon a time, in fact, if you had custody of a child under the age of 19 or a child under the age of 24 most of the time, you could deduct essentially $ 2,000 for yourself, your spouse, and dependent children . The law was and is Section 152 of the Internal Revenue Code. In 1984, Congress allowed the parties to agree to split the deduction as long as that agreement was included in IRS Form 8332. Life was simple, but Congress decided to adjust the amount for the inflation dependency relief.
In 1997, Congress decided to fumble even more. You received a small child tax credit ($ 400). A loan is a different animal than a deduction. If you are in a 22% tax bracket, a $ 2,000 tax deduction will be deducted from income. So you save $ 440. A tax credit is a dollar used to reduce your tax liability.
Fast forward to 2017. We had a tax reform bill for the late year that changed everything. Liberation from addiction; Path; at least until 2025. Tax rates for all tax classifications from single to married completely revised. And the tax credit has been juiced. Prior to 2018, the tax credit for households over $ 110,000 was more than pale. With the 2018 bill, the tax credit only stopped after $ 200,000 for single households and $ 400,000 for married / joint returns. And the loan itself was increased to $ 2,000 per child. The other big news was that under certain circumstances, you could get payment for the tax credit even if you didn’t owe income tax. So effective was a negative income tax that subsidized families with taxpayers’ money.
In 2020, the economy wavered as the pandemic influenza got the economy under control. Congress decided that money must be pumped into the economy through corporate loans and households. The latter was achieved in part through the American Rescue Plan Act of 2021. The tax credit is now $ 3,000 per child under 17 and $ 3,600 per child under 6. Half of the benefit is to be paid in the second half of 2021 by deposit from the finance department. Read every news aggregate source out there, and articles appear daily on who qualifies and how to get the money.
So the sharks are in the water and can smell stimuli. Meanwhile, the problem with all new laws is that the devil is in the details and the finance department is unable to manage those details.
With this in mind, we report two cases. The first is Donnelly v Donnelly, a non-priority Supreme Court decision of May 17, 2021. In quieter times, the Donnellys split and reached a sensible settlement that is not uncommon for all of us. They would take turns using the dependency waiver for their children from year to year. This actually worked until Congress decided to intervene by removing the 2018 exemption. The 2019 tax year was his father’s year, so he wandered over to his local H&R block and let her cook his return. When they fed it into the computer, it choked first because there was no exception. Don’t worry, he’d be content with the rewritten tax credit. But the IRS computer choked a second time because the mother had already filed a tax return claiming the children’s tax credit.
Papa wasn’t a happy taxpayer. So he went to his local Bucks County judge and demanded that his ex be despised for appropriating his addiction relief. Unfortunately, the court found that there was no exception because Congress took them away. But don’t worry, the court “interpreted” the tax law change as a justification for changing the support, so Papa received a $ 1,200 reduction in support, which reflected the tax credit that Mama had stolen. No contempt was found because what Mother did was not premeditated and a tax credit is different from an exemption from dependency.
Mama appealed. It didn’t change the tax system like Congress did, and it gave the tax credit to a person who qualified through primary custody. The revised childcare loan was a matter between her and the government. And that wasn’t money taken out of papa’s pocket to line hers. After all, the whole tax system had changed and tax rates were generally lowered. The 2014 agreement related to Section 152 Dependency Exemptions. What it requested and received was a Section 24 tax credit.
The Supreme Court took his father’s side, saying this should be treated as a request for change and the law had changed the circumstances. The order itself was not changed. Instead, Mom was instructed to return Dad the tax credit, which he couldn’t process because she had already filed a tax return and requested it. The Supreme Court saw no harm in this result, although apparently no amendment was requested and the only problem appeared to be the father’s “lost” tax credit money.
The statement cites a rule from Pa.RCP 1910.16 (f) that says it is in the power of a court to grant the child tax credit. The same provision then speaks about the liberation from the dependence, although there are two legally different animals. In the meantime, the IRS Form 8332, which will be the definitive document containing “Exemptions” for dependents, states that when signed, the release will include all forms of child tax credits if properly signed and filed.
In the Donnelly case, the court resolved the issue by changing the order to allow Dad to receive the 2019 tax credit household or child tax credits claimed by the non-primary custodian. In DeMar v Commissioner, the Revenue Court upheld a longstanding policy that Form 8332 is the only means by which the non-caring parent can apply for head of household or tax credits. In other words, the IRS does not want to see any agreements, court orders, or any other form of indication of an agreement. You either submit a signed Form 8332 or lose the fight. TC Memo 2019-91. You can ask a court to compel the custody parent to sign. You can get the court to change the order to get your money back. But it seems that even a court order assigning the dependency or tax credit did not induce the IRS computer in West Virginia to accept the claim. It’s pretty much a signed Form 8332 or a bust. In DeMar, the father even had the form signed. But because the custody parents didn’t change their return so that Dad could claim the child, the IRS said no to the changed return.
The IRS regulations governing this aspect of the law can be found in 26 CFR Sec. 1.152-4 (e) (1) (ii). It’s a maze of rules that reflect a real effort to get things right. But as many taxpayers know all too well, unless you join Mr Donnelly and take the matter to court, whoever files first can get the last laugh. Indeed, Mr. Donnelly got his $ 1,297 back, but at what price? With the tax credit now bigger and more accessible, we may be destined for more of these struggles. Once the dust settles, it’s not clear who will be the winner.