A lot has been said and written recently about the various credits put forth to counter the economic effects of the pandemic and how they affect parents’ tax liabilities.

But what about those taxpayers whose tax picture is, one could say, a bit more fluid? The Internal Revenue Service acknowledges some parents have legal agreements covering just who claims the child on their taxes.

These parents may be divorced; they may be separated; they may alternate claiming the child on their taxes. The IRS has now issued guidance targeted to these taxpayers and their unique responsibilities.

Economic Impact Payments and the Recovery Rebate Credit

The third Economic Impact Payment (EIP) was, in reality, an advance payment of the 2021 Recovery Rebate Credit, using the taxpayer’s tax information from 2019 or 2020 to determine if they were eligible for the credit and how much they should receive.

There are a couple of extra considerations for those taxpayers who share a qualifying dependent.

If an eligible taxpayer didn’t receive a third-round Economic Impact Payment for a qualifying dependent they’ll claim on their 2021 tax return, the taxpayer can still claim the 2021 Recovery Rebate Credit—even if the other parent claiming the shared dependent already received an EIP.

Conversely, if a taxpayer got a third-round Economic Impact Payment for a dependent they will not claim on their 2021 tax return, they are not required to pay back all or part of the EIP if the information on their 2021 return indicates they should have received less.

Child Tax Credit

The IRS used taxpayers’ 2020 tax returns to determine who got the advance child tax credit payments in 2021. If the IRS had not yet processed the taxpayer’s 2020 return, the agency used their 2019 return instead.

This means that the parent who claimed a shared dependent on their 2020 return would have gotten the advance payments of the child tax credit in 2021.

The IRS says parents of shared dependents have a couple of issues to think about:

• Families who knew they would not claim a child on their 2021 return had the option to unenroll from receiving monthly payments by using the Child Tax Credit Update Portal at IRS.gov. People who did not unenroll and received monthly payments during 2021 for a child they won't claim on their 2021 tax return could have to repay those payments when they file. They may be excused from repaying some or all of the excess amount if they qualify for repayment protection.
   
• An eligible parent who did not receive advance payments for a qualifying child will be able to claim the full amount of the child tax credit for that child on a 2021 tax return even if the other parent received advance child tax credit payments.

Those taxpayers who received advance credits during 2021 should compare the total amount they got with the total they are eligible to claim. An easy way taxpayers can make this comparison is to sign onto their Online Account.

Spouses should remember that if they received joint payments, they’ll have to each sign into their own online account so they can retrieve their respective amounts.

More information for parents of shared dependents can be found in the following resources:

• Instructions for Schedule 8812, Form 1040, Credits for Qualifying Children and Other Dependents
• Instructions for Form 1040, U.S. Individual Income Tax Return
• Calculating the 2021 Recovery Rebate Credit

Source: COVID Tax Tip 2022-29