Wait, What’s the Definition of ‘Child?’

By now, many taxpayers know the IRS began sending out monthly payments in mid-July as part of the Biden administration’s advance child tax credits. In a prior article, we looked at how the expansion of these credits provides both opportunities and potential issues for clients. The tax bill rolled out in mid-September by the House Ways and Means Committee seeks to extend the program through December 2025. But what didn’t immediately resonate with many of us who ploughed through the 881-page bill is that Congress is shaking up the traditional view on who is a child.

So what’s the definition of “child“? Like anything dealing with proposed tax legislation, the answer is simple: It depends.

The section of the new bill that discusses the advance child tax credit didn’t initially draw a lot of attention because all of the other applications for dependency and credit tests are built on a child having a familial relationship with the taxpayer (either by blood or through adoption).  This includes the IRS’s Qualifying Child Rules.

But the new bill, which I discussed in this recent column, expands the definition of child in a way not previously seen. And taxpayers will now be working with two definitions of “child” on different parts of the tax return, as the prior rules are not being removed.

“Qualifying” vs. “Specified” Child

Going back at least 20 years, the phrase used in the context of dependence tests has been “qualifying child.” This definition required the child to have a family relationship with the taxpayer. However, the House Ways and Means bill’s provisions related to advance child tax credits, which begin on pages 368 to 372 of the text, replace “qualifying child” with the term “specified child.” This is the first instance I could find “specified child” in U.S. tax code.

The term “specified child” has appeared since 2011 in the U.K., but they use it in the context of what we in the U.S. have traditionally referred to as the “qualifying child” because it’s also based on a family relationship test.

According to the House Ways and Mean bill, a “specified child” must meet the following tests:

1. Lives with the taxpayer for more than one half of a month.
2. Is younger than the taxpayer and will not be 18 the end of the month.
3. Receives care from the taxpayer that is uncompensated.
4. Is not the spouse of the taxpayer.
5. Is not claimed by someone else for that month.
6. Is a citizen, national or resident of the U.S.

Nowhere does the new legislation on advance child tax credits indicate that the child must be related to the taxpayer, either by blood or through adoption. The tests are conducted month to month, with the credits distributed each month based on the child’s status the prior month. Under this system we could potentially see some children claimed on 12 different tax returns for 2021 if they move from household to household.

The expansion isn’t surprising given Congress’s desire to provide additional funding to American taxpayers. This has been seen in various stimulus payments over the last two years, including:

1. The Families First Coronavirus Response Act (FFCRA), which was signed into law on March 18, 2020.
2. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020.
3. A $900 billion stimulus and relief bill which Congress passed and attached to the main omnibus budget bill on December 21, 2020.
4. The American Rescue Plan Act of 2021, which was signed into law on March 11, 2021.

These programs have sought in different ways to provide money to millions of people.

While the intent of this expansion of advance child tax credits is clearly to allow the credit to be claimed by as many taxpayers who are providing for children as possible, this may present several challenges:

• How will the Internal Revenue Service (IRS) monitor this expanded credit system for compliance? For example, although the tie-breaker rules as seen in the text on pages 371 to 375 are designed to remove as much ambiguity as possible regarding which taxpayer can claim a specified child, it remains to be seen how this will play out in tax filings.
• What amount of additional backlog will this add to the workload of the IRS and delay return processing for 2021? The IRS periodically updates its operations status here on different topics. As of September 18, 2021, the IRS held 7.8 million unprocessed individual returns from tax years 2020 and 2019, along with 2.8 million unprocessed amended tax returns for these tax years.  Also of note, as of the last available update on January 13, 2021, the IRS expected to process any checks mailed for payment within 60 days.
• How does the IRS plan to handle dispute situations in which two (or more) taxpayers claim the credit for the same child?
• How does the IRS plan to determine who is providing the qualifying care for a child?

As we all continue to work our way through the changes in our lives since March 2020 and the updates to tax filings, the following quote from author Laurence J. Peter, which appears on the IRS website’s tax quotes page, comes to mind: “Few of us ever test our powers of deduction, except when filling out an income tax form.”

John M. Gehri, CFP, ChFC is a vice president with Harvest Financial Advisors in Cincinnati, Ohio. John may be reached at john@harvestadvisors.com.