Negotiation Strategies for the American Rescue Plan |
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The impact of the American Rescue Plan on after-tax incomes and child support can be surprisingly dramatic -- but, for the most part, for 2021 only.
This newsletter will explain the strategic moves you may want to make to deal with them.
Here are some of the moves you might want to make:
- Negotiate a different support amount for 2021 than for future years.
- Try to make sure that your client can claim the exemption in 2021, and know the financial impact of doing so.
- Make sure that the majority-time parent is the parent who is making the child care payments.
- See what the total impact of the American Rescue Act provisions are on both parties' finances. It can easily be $15,000! Use this knowledge in your negotiations.
This email will explain those strategies and why you should consider them as you work with your clients.
Please forward this email to everyone in your firm who practices family law.
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Let's take as an example a situation where there are two children, ages 1 and 3, where the majority-time parent earns $3,000 per month and the other parent earns $6,000 per month, and where the majority-time parent pays $1,300 per month for day care.
In this situation, the provisions of the American Rescue Plan can change child support by hundreds of dollars per month.
In Illinois, for example, child support in this case (including add-ons) is $1,783 per month without the American Rescue Plan provisions, but $1,382 with -- a decline of $401 per month, just from the American Rescue Plan!
But in 2022, this all goes away.
What's your strategy for dealing with this?
Here is our suggestion: negotiate a different child support amount for 2021 than for future years.
So if you were in Illinois and had this case situation, you might specify child support of $1,382 for 2021 and $1,783 for future years.
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Another dramatic change affects the child tax credit (also known simply as the child credit).
In our hypothetical scenario, with two young children, the child tax credits available jump from $4,000 in 2020 to $7,200 in 2021 -- an increase of $3,200!
And, in 2020, only $2,800 of the $4,000 was refundable, whereas in 2021, the full $7,200 is refundable.
(A refundable credit is one that results in a government payment to the taxpayer if -- as often happens -- total credits exceed total tax due.)
Note that in 2022, the child tax credit is scheduled to drop back down again to 2020 levels.
What does this mean for you?
As we think about it, it is key to remember that parties may negotiate which party claims the child tax credit. (This is because parties may negotiate which party claims the exemption, and only the party who claims the exemption may get the child tax credit.)
This change raises the stakes on who claims the exemption.
Also, think in particular about situations where the parties alternate exemptions. You really want the alternation to happen in such a way that your client claims the exemption in 2021.
It can make a difference of thousands of dollars to your client.
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In addition to the child tax credit, there was also a big change in the child care credit.
In our hypothetical case, the child care credit went from $1,440 to $7,800 -- a difference of $6,360.
And, it went from completely non-refundable to totally refundable.
In our case, the parent went from getting no actual tax benefit (because other credits reduced tax to zero) to getting $7,800 of benefit. Another wow!
How does this affect your strategy?
You want it to be the case that the party with whom the children live more than half the time is also the party who pays the child care expenses.
Otherwise, neither party would be able to claim the child care credit, and that huge tax benefit would go to waste.
If the other party has been paying those expenses, you might want to convert that payment to spousal maintenance, or to a designated add-on to child support, and have the parent with whom the children live make the day care payments.
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If you add up the effects of the stimulus payment, the Child Tax Credit, the Child Care Credit, and the Earned Income Credit, the totals can be quite dramatic.
In our hypothetical scenario, in 2021, because of these tax changes, the government will end up paying the majority-time parent $19,921 -- that is, almost $20,000!
And this is the net figure, even assuming that there has been no wage withholding during the year.
Next year, the government will pay our majority-time parent $5,860. That's a good amount, but not nearly $20,000.
So not only is the number large, but the change for 2021 is large as well -- more than $14,000!
What can you do?
When negotiating child support and maintenance payments, you really want to know the impact of the American Rescue Plan on the finances of the parties.
That way, you can negotiate a fair outcome for your client.
And, again, you may want to negotiate different arrangements for 2021 than for future years.
Family Law Software makes all this easy.
Start with Reports > Budget Report, to see after-tax cash flows.
Then drill down to Reports > View/Edit Taxes to see the tax detail.
You can also use Analysis > What If to get clear and powerful side-by-side alternatives for key decisions like child support, spousal support, wages, child care, and mortgage payments.
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The provisions of the American Rescue Plan described above are effective only for 2021.
But it is not impossible that Congress will pass a law extending those provisions.
How do you deal with this?
You might want to explicitly provide that the 2021 arrangement stays in effect for as long as the tax law provisions relating to child tax credit, child care credit, and earned income credit remain in place.
That way, you will not have to revise the agreement again if Congress does extend these tax provisions.
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As you do all these negotiations, you will want to be able to project what budgets and cash flows will be in 2021 if the law remains in effect.
Family Law Software makes it easy to see the impact of the American Rescue Plan, both for 2021 and for future years.
Just go to the top of the child support screen, or go to the place where you enter wages.
You will see a checkbox to calculate everything either with or without the American Rescue Plan provisions.
With one click, you can see the impact on child support, taxes, budgets, and cash flow.
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And thank you for making us the leading software for family law professionals nationwide.
We help you practice more profitably with Family Law Software.
We are very pleased to have incorporated these complicated changes so quickly, and to be able to bring you these important practice tips.
Stay safe and have a good start to Spring!
Sincerely,
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60 Thoreau St. Ste 268
Concord, MA 01742-2456
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