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!
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.
CHILD TAX PAYMENTS - INVEST FOR YOUR CHILD?
July 20, 2021
Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.
Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.
Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed.
Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.