A tax credit created in 1997 is getting an upgrade, which will send more federal money to help the majority of American families.
Starting July 15, 2021, the Internal Revenue Service (IRS) will increase the child tax credit for children under the age of six to $3,600, and for children between six and 17 to $3,000 from its current $2,000 per child.
This money is part of the $1.9 trillion stimulus package, called the American Rescue Plan, signed into law in March, 2021. It is an expansion of the existing child tax credit of $2,000 per child. The child tax credit began in the 1990s as a $400 per child credit for lower income families.
These payments for children follow the three rounds of direct payments sent out as a result of various pandemic-related stimulus packages. The tax credit increase is currently only for the 2021 tax year, but President Biden and other lawmakers are reportedly exploring making the changes more permanent.
The changes to the tax credit come as inflation has driven costs for families to their highest level since 2008. Prices have increased for everyday items including food, clothing, shelter, fuel, transportation, doctors’ and dentists’ services, drugs, and other goods and services.
Meanwhile, the Covid-19 pandemic has rattled the U.S. economy, hurting the lowest earners the most. The economy lost more than 8 million jobs in the spring of 2020, with the lowest quarter of wage earners shouldering 80% of the total job losses for 2020. The leisure and hospitality sector saw the biggest dip, followed by government, education, and health services. And in those industries, lowest average wage and lowest average hour occupations are suffering the most even a year later.
How the tax credit works
The revamped tax credit will reportedly benefit 88% of American families with children. Individuals who earn an adjusted gross income (AGI) of $75,000 or less, married couples who earn $150,000 or less, and heads of household who earn $112,500 or less will be eligible to receive the credit.
The credit begins to phase out for individuals and married couples who earn more and completely cuts off for individuals who make $95,000 or more annually and married couples who make $170,000 or more. The credit ends completely for individuals who earn approximately $200,000 or more, and married couples who earn $400,000 or more.
Additionally, those who qualify can receive half of the benefits as monthly payments, and the other half after filing their tax returns for 2021. Those monthly payments reportedly will be $250 per child between six and 17, and $300 per child under 6. Taxpayers can still opt to receive the full amount after filing. Dependents who are 18 years old or 19 to 24 years and in school full time for at least five months per year are eligible to receive a $500 annual nonrefundable tax credit.
How to claim your credit
Families who qualify for the tax credit and who filed taxes for 2019 or 2020 will automatically be enrolled to receive the direct monthly payments starting in July. The IRS sent letters to more than 36 million families alerting them of their eligibility for the payments. If you earned less money in 2020 than you did in 2019, and you have yet to file your taxes because of an extension, you may want to consider filing soon to receive the monthly payments.
If you don’t typically file taxes because you earn little or no income, you can use a tool from the Treasury Department and the IRS known as the Non-filer Sign-up tool. People who are underserved, experiencing homelessness, or who don’t file for another reason can use this tool to register for the monthly payments if they are eligible.
Families can opt out of monthly payments and instead receive the money in one lump sum as a tax refund when they file at the end of the tax year. In that case, parents must unenroll for the monthly payments using the Child Tax Credit Update Portal.
Using your child tax credit
You probably have a good idea of how you plan to use your child tax credit, whether it be on school supplies or groceries for your kids, or whether you want to save or invest the money for your kids’ future.
If you set up Direct Deposit with your 2020 tax return, you’ll receive your child tax credit via Direct Deposit. Your Stash account can help you spend or save the money for your kids. You can set up Goals in your Stash account, such as spending on child care or paying for groceries or school supplies.2
You can also set up a custodial account for your children with Stash.3 A custodial account is essentially a brokerage account for children to access when they reach the age of majority, which differs from state to state, with some investing and tax benefits. Custodial accounts have been around for decades. They’re also known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. Generally speaking, different states typically allow one versus another. UTMAs allow for investments in more types of assets, including real estate. UGMAs confine themselves to more traditional securities.
With Stash+4, you can open two custodial accounts.