The American Rescue Plan, passed in March, made important changes to the child tax credit for 2021 that are now being felt in the pocketbooks of about 35 million families. Starting in July, eligible families began receiving hundreds of dollars in direct monthly payments that will continue through the end of the year.
Families who struggle to pay monthly expenses will likely use the payments to cover bills, pay down debt, or build a safety net. But a significant number of families may choose to save or invest, or even to unenroll to stop receiving payments.
In a survey by the personal savings app Stash, more than half of respondents said they plan to save rather than spend the tax credit. This interest in savings could make now a good time to connect with your clients to discuss opportunities.
Following are a few things to keep in mind:
Automatic payments equal half of the total credit
While the child tax credit has been around for decades, it is new for parents to receive half of the credit in monthly payments from the IRS. The remainder of the credit will be applied when recipients file their taxes.
The per-child credit increases for many families
The enhanced child tax credit raises the amount from $2,000 per child to as much as $3,600. The amount depends on two factors: the child’s age and the parents’ income. Eligibility is based on 2020 taxes.
The full enhanced tax credit for children under age 6 is $3,600 (which translates to a $300 monthly payment). For children ages 6 to 17, the enhanced credit is $3,000 ($250 monthly). The full amount is available to married couples filing jointly with incomes up to $150,000 or single parents filing as head of household with incomes up to $112,500. Families above these thresholds continue receiving the regular child tax credit.
Some eligible parents might want to skip the payments
The monthly payments are, essentially, an advance on future tax refunds. People such as freelancers, independent contractors, and others who typically owe taxes at the end of the year may want to skip the monthly payments, choosing instead to have the full credit applied when filing their 2021 taxes. Families who have seen a large increase in income since 2020 may also find it beneficial to opt out. The IRS offers a portal to unenroll from the payments.
Many options exist for families who are thinking about investing
There are no requirements for how the enhanced tax credit payments must be used, making investment in families’ futures an attractive option. An increase in monthly cashflow can provide a great opportunity to begin, or increase, investments, specifically those focused on children’s futures including 529 plans, custodial accounts, or a custodial Roth IRA to get a jump on retirement investing.
As you have discussions with families about investing in their futures, FundVisualizer can help you compare funds, model portfolios, and share with clients.
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Putnam Retail Management.