Millions of families have been receiving monthly advance payments of the Child Tax Credit. Provided by the American Rescue Plan that was passed earlier this year, these payments have been going to eligible households since July.

As with any tax-related change, taxpayers have understandably had questions. While the “Advance Child Tax Credit Payments in 2021” page on IRS.gov aggregates answers to many frequently asked questions, the Internal Revenue Service this week clarified how child custody can affect the payments—from shared custody to alternating custody arrangements.

How does custody affect eligibility for the Advance Child Tax Credit?

The IRS based eligibility for the Advance Child Tax Credit on the most recently filed tax return. That’s because these advance payments are for tax year 2021, and—obviously—taxpayers won’t file this year’s return until 2022.

Whichever parent claimed the qualifying child (or children) on the most recently filed return has, in all likelihood, already been receiving payments for the past few months. While that seems cut and dry, the situation gets tricky when parents alternate custody for the purposes of claiming the Child Tax Credit. This can result in the parent who claimed a child for TY2020 receiving payments that should—according to their arrangement—go to the other parent.  

Taxpayers who receive payments but are ineligible could be on the hook for a pretty big tax bill in 2022. The IRS says the first step these parents should take is unenrolling for payments on the Child Tax Credit Update Portal. However, the IRS notes that “if their custody situation changes and they are entitled to the child tax credit for 2021, they can claim the full amount when they file their tax return next year.”  

To read the full press release, check out the source link below.

Source: COVID Tax Tip 2021-147