Monday, August 4, 2003

Tax quirk could cost millions

Some will get extra $400 child credit

By James McNair
The Cincinnati Enquirer

In what appears to be an unintended consequence of the tax cuts enacted this year, divorced parents who take turns claiming their children on tax returns will receive $400 more per child in credits than other parents in the 2003 tax year.

As part of the $350 billion tax-cut package enacted May 28, tax credits for children under 17 were raised to $1,000 from $600 for each of the first two children. To stimulate the economy, President Bush and Congress called for the $400 increase to be paid this summer as an advance on 2003 tax returns. Many checks have already been mailed.

But because of the combined effect of divorce agreements and the government's decision to mail the advances to whoever received the child credit for 2002, some divorced couples will receive $1,400 in cash and tax credits between them.

If, for example, the divorce decree called for the ex-husband to receive the 2002 child credit on a child, then he would receive the $400 check for that child this summer. And when the ex-wife claims the child credit on her 2003 return, she will be entitled to claim $1,000.

"It's the way the law was written," said Chris Kerns, an IRS spokesman in the agency's Cincinnati office.

With thousands of divorced parents sharing the tax benefits of their children, the $400 in additional credits could quickly add up to millions for the U.S. Treasury.

Terry Gilkey and Gwen Wise, a married couple in College Hill, thought it was a mistake. Gilkey has an 8-year-old daughter with a former wife. Under the terms of their divorce, his ex-wife could claim the daughter for tax purposes in 2002, he in 2003. Learning that she would be receiving a $400 advance on a tax credit that he would claim, Gilkey and Wise wrote to the IRS for clarification - and was told that Gilkey and his former wife would indeed receive a total of $1,400 for 2003.

Gilkey said the provision sounds excessively generous.

"They shouldn't be paying this out to people who are not supposed to be getting it," he said. "I understand the need for a spark to the economy, but I don't think this is a good idea."

"Many times, the parties simply structure an arrangement between themselves to alternate the child exemption, and it gets embedded in the divorce decree," said Scott Santangelo, who practices family law in Hyde Park. "The tax credit is a new wrinkle on the exemption."

George Yin, chief of staff of Congress' Joint Committee on Taxation, confirmed that the tax law language provides for the $400 overpayment.

"It was contemplated that the whole advance payment mechanism would have a certain amount of inaccuracy in it," Yin said. "Some people ineligible for the credit will receive the credit this year solely because they received it last year. That doesn't have to be repaid."

Yin said he wasn't aware of the child credit quirk in divorce cases. He expressed no concern about it.

"There are going to be these oddball situations," he said, "and certainly what you describe is one of those oddball situations."

Kerns said advance child tax credit checks will be mailed to 25.3 million people nationwide, including 992,000 in Ohio, 582,000 in Indiana and 349,000 in Kentucky. He could not estimate the cost of giving an extra $400 to divorced couples alternating the credits.

"It'll be next to impossible to calculate that without looking at, state by state, how many parents have divorce terms calling for alternating years of claiming tax credits for dependents," Kerns said.


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