In March 2020, Congress passed a $2 trillion stimulus bill called the CARES (Coronavirus Aid, Relief, and Economic Security) Act to help Americans financially survive social distancing. The CARES Act provides direct payments of $1,200 for every adult and $500 for every child to individuals earning below $75,000 (for a household, the payments are $2,400 for a married couple and $500 for each child to couples earning less than $150,000). For individuals or couples who earn above the limit, payments are means tested and reduced by $5 for each $100 of earned income above the limit.
If You Are Divorced. If a couple has divorced and each person filed their individual 2018 or 2019 tax returns, the IRS will use those bank routing numbers to send CARES Act checks to each of them individually. The IRS will send the child payments to the spouse claiming them as dependents. If the IRS does not have your correct bank information on file, you may send it to them. If a divorced couple have not filed their individual tax returns after the divorce, the IRS will use the banking information on file and send CARES Act checks to that bank and the other spouse will have get their money from the ex-spouse.
Divorce Issues for 2018. The CARES Act payment will be sent automatically to the direct deposit bank account listed on a 2018 or 2019 tax return, to the bank account where you receive your Social Security check, or the IRS will mail the check to the address listed on the 2018 or 2019 tax return. A problem can occur if one spouse paid the IRS tax liability out of a personal account and that is the account of record with the IRS, or one spouse retained the IRS account after the divorce. In these cases, the spouse who controls the IRS account will receive a check intended for the entire family, including the divorced spouse and their children. If the IRS account has been closed, the IRS will send the CARES Act checks to the address on the 2018 or 2019 tax return—which will generally be the home of the custodial parent. Because the CARES Act had not been passed in 2018, there will be no provision in the divorce decree for dealing with getting the other spouse’s funds from the IRS account or getting the custodial parent to pay the funds to her ex-spouse. If you are in this position and are not certain who retained the IRS bank account or where the CARES Act funds are being sent, proactively communicate with your ex-spouse or your collaborative divorce attorney to resolve the issue.
Who Gets the Child Payment? If there are children in the family, who should receive the funds on their behalf? Generally, the parent who claimed the child as dependents in 2018 or will be eligible to claim them as dependents in 2019 will receive the CARES Act payments of $500 for each child. If the checks are sent to the address of the custodial parent, that is not a problem. However, if they are sent to the IRS account of the non-custodial parent, the custodial parent needs to proactively contact their ex-spouse immediately.
Means Testing of Payments. Another problem can occur because CARES Act checks are means tested before they are distributed to families. Each individual will receive the full $1,200 payment if his or her income for 2018 or 2019 was $75,000 or less ($150,000 for a married couple). However, if the individual or family income was above the limit in 2018 or 2019, the payments will be phased out at the rate of $5 for every $100 of income over the applicable limit. Imagine that a couple was divorced in 2018 and the husband earned much more than $150,000, while the wife stayed home and raised their children. It’s now 2019, their divorce has been finalized, and the wife may have just started working again at a much lower wage than her husband earned prior to the divorce. At the same time, the husband may be making the same amount and be phased out completely from the CARES Act payment. If both spouses have not individually filed their 2019 tax returns after the divorce, the single mom with kids won’t get a dime because the IRS will believe they are still married and their income is too high to qualify for a CARES Act payment based on the joint 2018 tax return. This issue can be fixed, but the single mom will not receive the funds for some time because of the delay in fixing the paperwork and that can cause real hardship for her. We suggest he or she proactively communicate with the ex-spouse or a collaborative divorce attorney about fixing this problem immediately.