All About the Child Tax Credit
Taxes: A Necessary part of Financial literacy
FUN FINANCIAL FACT
The Biden Administration estimates that for every $1 invested in children through the newly expanded child tax credit, there is an $8 return to American society through a reduction in crime, improved educational outcomes, increased future incomes and better overall health for children and parents alike.
Introduction to the Child tax Credit
35 million American families got a welcomed bonus when the first monthly child tax credit payments hit bank accounts. These cash payments are part of President Biden’s American Rescue Plan Act and will extend through the rest of 2021 with some family advocates hoping to keep them permanent. While the child tax credits are not new, these expanded benefits will not only increase the amount available per child but also include direct monthly payments to families for the first time.
Who Is eligible
90% of American families will receive these expanded benefits. Families can earn up to $3,600 per child under the age of six, and $3,000 for children ages six to 17. Half of the funds are distributed in the form of direct monthly payments to families, while the other half will be received through tax returns.
To be eligible for the full monthly payments of up to $300 per child, single parents must earn less than $75,000 or $150,000 for parents filing jointly. Beyond this, payments are reduced by $50 for every additional $1,000 of income. Even families earning up to around $400,000 in a joint filing are eligible for some monthly benefits.
While the benefits help even middle class families by countering the rising cost of raising children in America, the new child tax credit is now fully refundable. This means millions of American children will now be eligible for full benefits after being previously excluded because their families’ income was too low or they paid no taxes. Those children are typically the hardest to reach, and the IRS has set up a special portal for the neediest families to receive the direct payments as seamlessly as possible. Even parents who are not U.S. citizens are eligible for the child tax credit if they have individual taxpayer identification numbers and their children have Social Security numbers.
Want to know exactly how much your family’s child tax credit is? Use this online calculator to find out.
Why The Child Tax Credit matters
Experts predict that the American Rescue Plan Act’s new child tax credit could lift 5 million children out of poverty and effectively help cut child poverty in half. With an average monthly payment of $423, the child tax credit could make a real difference for countless American families by helping to cover critical needs like childcare, housing, healthcare and food.
While the payments are scheduled only through the end of 2021, President Biden is hoping to make them permanent. The President claims that the extended child tax payments will not only help the neediest families out of poverty, but also strengthen the middle class.
The past year has been hard on American families. During the course of the pandemic, over 4 million women left the workforce, and there’s no doubt that Covid-19 hit working mothers especially hard. Biden hopes the expanded child tax credit will help mothers reenter the workforce, ease the financial burden of raising children and act as an investment in American families.
The Biden administration says direct payments to families will improve test scores, raise graduation rates, increase college attendance and ultimately allow young workers to make more money. Republicans, however, counter that the new child tax credit will lead to an expansion of the welfare state as well as discourage parents from seeking employment.
Additionally, since the expanded child tax credit now comes in the form of direct monthly payments earmarked in bank accounts as “CHILD CTC,” experts predict that parents are more likely to allocate it directly to their children’s needs (new school supplies, music lessons, play therapy for autism, etc) than when it previously came lumped in with other tax refunds.
There’s no doubt many of these payments will get put to immediate use to cover household necessities. However, if parents are able to invest some of their child tax credit payments, the results are eye-opening.
If parents invest an average of $2,000 per year starting at birth, young adults will have over $64,000 when they turn 18 (with some basic tax/market assumptions). The fun’s not over yet. If that money stays invested until retirement, it will be worth a whopping $1.1 million by age 67. Talk about the power of compounding.
How do you think your family will use the extra monthly payment from the child tax credit?