Many of Americans woke up to a surprise in their bank accounts last Thursday morning. An extra deposit, they may or may not have been expecting was delivered, courtesy of the $1.9 trillion American Rescue Plan Act of 2021. This money, while extended above normal levels, is an advanced payment of the credit you’d normally claim when filing your taxes.
The thought process, at least in my opinion, was to give Americans money now, when they may need it more, while recovering their life from the pandemic, than waiting for the 2021 tax season to roll around, in 2022. With a record 9.3 million job openings in the US right now, you could argue that, a cash flow crisis is now what is hurting Americans at the moment, but rather the supply chain shortages and rising inflation numbers are something to be more concerned about. But alas, here we are, and it begs the question what should one do with these payments?
While, currently the American Rescue Plan Act of 2021, is set to expire at the end of this year, it certainly has been discussed, that this could be made permanent, at least for a few more years. Let’s assume, that you as a parent are reading this and understand that compound interest is the eighth wonder of the world. You know that the younger you save, the less you have to save to end up with a very large number. So technically, getting this increased windfall in monthly installments may be extremely beneficial, perhaps not changing your total tax situation, but rather giving it to you in installments you can then immediately put away for little Johnny.
Let’s run through the numbers really quick. The child tax credit typically gave qualifying families a $2,000 credit per child. You’ll now be receiving (again for 2021 only currently) $3,600 for child that are younger than age 6 and for child from 6 to 17 you’ll receive $3,000. These are all subject to income limitations.
INCOME AND AGE CAPS FOR THE CHILD TAX CREDIT
Family Upper-Income Qualification Limit
Single filer -- AGI below $240,000
Head of household -- AGI below $240,000
Couple filing jointly -- AGI below $440,000
Dependent Age Qualifications
Ages 5 and younger -- up to $3,600
Ages 6 to 17 -- up to $3,000
Age 18 -- $500
Ages 19 to 24, full-time college students -- $500
Young Married Couple – 1 Child, Age 2
Mr. and Mrs. Smith were just married four years ago and welcome their daughter Cecilia, into their family nearly two years ago. They have decided since they are in Baby Steps 4, 5 & 6, that they would like to use this child tax credit for Cecilia’s retirement. They are going to put the entire credit away this year in a UTMA account and will continue to put the $2,000 child tax credit (we are assuming it drops back down in 2022) in the following years until she turns 18.
By the time Cecilia is 18, they’ll have saved $31,998 by initially contributing $3,600 for 2021 and $2,000 every year afterwards concluding when she is 18. That account would have been worth around $77,425, assuming an 8% rate, meaning her investment gain was $41,826. Not a bad haul for little Cecilia at 18, but, because she was raised in a smart money home, where she has been taught the principals of Ramsey Solutions & Whitaker-Myers Wealth Managers, through amazing tools such as Financial Peace Jr., she knows that she should allow this money to continue to grow for her future retirement. She keeps the money invested but never contributes again to this specific account and follows her own Baby Steps, which help her and her family to succeed with money. At some point within Cecilia’s adult life her parents pass away and she thinks about the wonderful blessing her parents have left her, through their savings of her child tax credit. She continues to let it grow. By the time she turns 67, this account is now worth $3,851,819, at the assumed 8% rate of return. Remember, we said that Cecilia was a smart 2nd generation FPU kid, so she has saved enough on her own to fund her retirement so she continues to allow this money to compound and grow. By the time she is 80, it is worth a staggering $10,860,085. Cecilia is actively involved in her church and she is able to donate the money for her entire church to build an orphanage in a third world country, she is able to fully fund a pregnancy center that supports the right to life, she is able to change the world!
Conclusion
If anything, this child tax credit payment has brought attention to your ability to use it to bless your child and leave a legacy for them for generations to come. Proverbs 13:22 says, “a good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous”. While we believe an inheritance, is not always financial, it could be things such as wisdom, memories, love and many other things you can bless your children with, we certainly know that money given to them is the byproduct of your hard work, savings and wisdom, over your lifetime.
Use this Child Tax Credit as a catalyst to consider the ways you can help to build financial security for your child. Your Whitaker-Myers Wealth Managers Financial Advisor, is here to help you implement your child savings goal, with the correct account and amount today.