Child Tax Credit Stimulus Money:
Starting as early as July 15, 2021, families will start receiving the Child Tax Credit (“CTC”) monthly for the next six months, or until the end of 2021. Depending on the age of the children in the family and their household income, monthly payments of $300 for each child under the age of 5 and $250 for each child aged 6-17 could be coming to these children’s households. For information on eligibility, visit the IRS website through this link and click on the “Use the Eligibility Assistant” link.
As an example, if a family has a 3-year-old and 6-year-old, the parents earned less than $150,000, and filed taxes jointly, then this family would receive the full CTC. So that means they can expect to receive the full $550. They will continue to receive the same amount monthly through 2021. In January, February, March there will be no payments made to the family. In April 2022 when the family files their annual taxes, the government will take into account the $1,800 and $1,500 worth of child tax credit already issued ($1,800 for the 3-year-old and $1,500 for the 6-year-old) and the family will receive the remaining half after they file their taxes.
The CTC is a part of The American Rescue Plan Act that is intended to stimulate the economy. It is a pre-payment of the tax credit that families would receive for their children in 2022. You can either choose to claim 100% of your 2021 CTC on your taxes when you file your 2021 taxes that are due in 2022, or you can get 50% of that money now and claim the other 50% on your taxes later. In order to know whether you will receive the CTC prepayments or to choose to defer them until to you file your taxes in 2022, you can visit the IRS website through the same link in the preceding paragraph and click on the “Manage Payments” link on the website page.
Invest in Future:
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. The CTC could be an excellent way to invest in your children’s or grandchildren’s future. We also look at a 529 plan as a versatile investment vehicle and estate planning strategy for many of our clients.
Many states have their own 529 plan and some states even have multiple 529 plans. So, parents are not limited to any particular 529 plan, but the incentives of the Indiana CollegeChoice 529 plan benefit Hoosiers so I will refer to the CollegeChoice plan in this article. One tax advantage is a state income tax credit equal to 20% of a contribution to a CollegeChoice 529 account, up to $1,000 per tax year. For a contribution to be valid for the tax year in question it must be deposited into the account by December 31st. Additionally, tax advantages are that the investment can grow tax deferred and be withdrawn tax-free for qualified expenses.
Pizza is not a qualified education expense, but things like tuition, room and board, books, and a computer do apply. You can even use up to $10,000 per year for tuition at private schools from grades K-12. If the beneficiary does not go onto college, the funds can be used for trade and vocational schools.
Related to estate planning, you can reduce your personal taxable estate by making 5 years’ worth of gifts in one lump sum. This means an individual could contribute $75,000, or $150,000 for a married couple filing jointly, to one recipient. Additionally, money remaining in the account will not be included in the account owner’s estate for federal estate tax purposes.
If you contribute to a 529 for your granddaughter, Susie, you technically own the account, but designate Susie as the beneficiary of the account. You can change the beneficiary if Susie does not use all the money and you control the funds regardless of Susie’s age. So, after Susie graduates from Indiana University with a liberal arts degree, a simple beneficiary designation change of the funds can make Benjamin, Susie’s little brother, the beneficiary as he attends Purdue University.
Opening a 529:
It is relatively easy to start a 529 account. You can do it on your own or have a financial advisor assist you. In a follow-up article I will walk through setting up an account and contributing to one through the Indiana CollegeChoice plan. For more information, visit the Indiana CollegeChoice 529 website. Also, if you are considering a 529 education plan as a strategy in your savings plan, please consult with our office, or a trusted financial advisor in advance.
Samuel D. Ladowski