Personal Finance

Forget Stimulus Checks – It’s The Child Tax Credit That Is A Real Gamechanger

As President Biden prepares to sign the American Rescue Plan into law on Friday, he is ushering in a new era for American families. Beyond the promise of $1,400 stimulus checks, some Americans will be getting access to a unique income stream from the federal government – and it all has to do with the Child Tax Credit.

The Child Tax Credit has long been a part of the tax code since the Clinton Administration. But this new and improved Child Tax Credit is unique. Qualifying families will be eligible for a credit of $3,600 for children under age 6 and $3,000 for children ages 6 to 17. This is a significant increase over the existing Child Tax Credit which was $2,000 for each child under age 17.

Along with the increase in the value of this credit, there is a real game changing feature: for the first half of the credit, Americans do not have to wait until they file their 2021 tax return in 2022 to gain access. Rather, the credit would pay monthly to families from July to December. Then the remaining half of the credit would be paid on the tax return. For instance, for a family who has two children ages 3 and 7, they will receive a $600 monthly check for the younger child and a $500 monthly check for the older child. Since this is a credit, it is a tax-free income stream.

Not Everyone Qualifies

Keep in mind not all Americans will qualify for this credit. Like the stimulus checks, it will be based on adjusted gross income (AGI). Single taxpayers will be eligible if their AGI is $75,000 or less, and married taxpayers are eligible with an AGI of $150,000 or less. The credit will be phased out for incomes over these amounts.

However, while the Child Tax Credit is being revamped and supersized for taxpayers in these income ranges, that does not mean the existing Child Tax Credit is unavailable for Americans whose incomes are higher. For those taxpayers, provided they are still within the AGI limits, they can still obtain a credit of $2,000 on their tax return for each child under age 17. They just need to make sure their income was $200,000 or less if single and $400,000 or less for married filing joint. Further they will not be eligible for monthly payments.

Level Playing Field

Yet unlike the existing Child Tax Credit, how this credit will be allocated on a monthly basis will be changing the financial situation for many Americans.

“The pandemic has further exposed the fragility crisis in our country,” says Dr. Billy Hensley, Ph.D., President and CEO of National Endowment for Financial Education (NEFE).

Prior to the pandemic, many Americans lived paycheck to paycheck with the Federal Reserve finding in 2019 that a third of all American households could not cover a $400 emergency. That fragility was tested over the pandemic where many Americans are feeling more precarious than ever. In fact, NEFE found in early 2021 that 68% of households experienced a financial setback in 2020 due to the pandemic. This setback was most felt for lower- and middle-class Americans.

As a result, a child tax credit that will pay out monthly will be a gamechanger. That additional cash flow might be the difference between a family living with financial stress to one having greater financial resiliency. Further, to obtain the credit, individuals do not need to have household income. This feature will allow the credit to benefit the lower income group at a deeper level to help.

The move is not without controversy. But given the challenges of the pandemic, many feel it is warranted to help those who have struggled.

“There are many priorities and considerations for those who have been hit with financial challenges from all sides,” says Hensley. “Yet, stimulus payments to boost an emergency savings is warranted because we have seen the devastation that can be wrought by not having a safety net.”

Yet one thing that Americans will need to keep in mind is that the monthly income feature of this credit is not permanent. Yet there are members of Congress who are looking to make this permanent going forward. But for now, for those in need, a lifeline is being created.

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