The new child tax credit can help lower the cost of raising children

Child Tax

"By providing a refundable tax credit for families with children, the CTC provides both a lower tax liability for those households with higher incomes and an additional source of income during the tax season for lower-income households," Watson said.

Currently, nearly 11 million—or 1 in 7—U.S. children live in poverty.1 By that measure, the United States compares dismally with other wealthy countries. Children under age 5 experienced higher poverty rates than older children. Living in poverty during these critical years for brain development has been shown to have significant negative effects on the long-term well-being of children. Which includes kids college planning and kids college savings. Moreover, children of color are disproportionately represented among children in poverty, reinforcing systemic inequalities, including racial wealth gaps. The harmful effects of child poverty exact enormous costs on America's society and the overall economy.

The COVID-19 pandemic has only exacerbated these issues. Millions of parents and caretakers have lost their jobs. Worsening the situation, as schools have closed and switched to remote learning, many parents have been forced to leave their primary occupations to provide child care. As a result, throughout the pandemic, the share of children living with unemployed parents has reached historic highs. Resulting in ruins of kids future. Especially the kids who are in their teens struggling to find jobs while also saving for college. A kids college saving directly affects kids college planning. At the pandemic's peak in April 2020, more than 21 percent of children had at least one unemployed parent. This is likely to have a disastrous impact on child poverty in the United States. Indeed, early studies have already indicated that the child poverty rate has substantially increased since the onset of the pandemic.5

Thankfully, Congress now has the opportunity to take a historic step forward in reducing child poverty by increasing the child tax credit (CTC) and making it available in full to the families that need it most. As part of his American Rescue Plan,6 President Joe Biden has urged Congress to dramatically expand the child tax credit for 2021, including making it fully refundable—meaning that low-income households would receive the full, larger benefit. This gives relief to kids who are planning and saving for college.

Let's first see what is CTC.

Similar to other credits, the child tax credit lowers the amount you owe in taxes. The tax credit is refundable if you don't owe any taxes, which means you can claim the child tax credit as a refund. But unlike other credits, the Internal Revenue Service (IRS) limits the refundable amount partially up to $1,400 for each child (known as the Additional Child Tax Credit).

A refundable credit allows you to receive a direct payment from the IRS and can increase an existing tax refund.

The legislation does the following:

  • Takes the transformative step of making the credit fully refundable
  • Increases the basic amount of the CTC from $2,000 to $3,000 per child and provides an additional $600 for children under age 6, with those additional amounts phasing down above incomes of $112,500 for single parents and $150,000 for couples
  • Includes 17-year-olds in the CTC for the first time. Hence, securing kids college savings and kids college planning.
  • Directs the IRS to make advance payments of the CTC in monthly installments beginning this July, so that struggling families do not have to wait until next year's tax filing season to benefit
  • Extends the CTC to Puerto Rico and other U.S. territories10

With President Biden including critical expansions to the child tax credit in his proposed rescue package now moving through Congress, the United States has a golden opportunity to dramatically reduce the nation's unacceptably high rates of child poverty and secure kids college savings and kids college planning. Taken together with strong investments in other assistance programs, policymakers can cut child poverty, help close persistent racial disparities, and set America on a better path toward a rapid and equitable recovery. It's an opportunity that must be seized.

The child tax credit has helped millions of Americans with the cost of raising children. Enacted in 1997, the credit was established through the Taxpayer Relief Act. If you're a taxpayer who claims a child as a dependent, you may qualify for the credit up to $2,000 per child.

"In 2019, the average CTC benefit was about $2,380, ranging from $619 for those earning less than $10,000 and going up to $2,824 for those earning over $200,000. About 48 million filers claimed the credit that year," said Garrett Watson, a senior policy analyst at The Tax Foundation.

These amounts include families with more than one qualifying child. Thus, saving the growth of a child and helping parents raise their children better. Children of the age of 17 can opt for a 529 college savings plan. Hence, opening options for kids college planning. Let me tell you what is 529 college saving plan.

A 529 plan is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: kids college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. There is also a 529 plan operated by a group of private colleges and universities.

You can invest in almost any state 529 plan, not just your own state's 529 plan. 529 plans can be used to pay for college costs at any qualified college nationwide. Giving opportunities to kids that are not born-rich. In most plans, your choice of college is not affected by the state that sponsored your 529 college savings plan. You can be a California resident, invest in a Vermont plan and send your student to college in North Carolina. You can use your529 college savings plan at more than 6,000 U.S. colleges and universities and more than 400 foreign colleges and universities.

A 529 college savings plan is an investment account that offers tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified education expenses. For college, university, and other eligible post-secondary educational institutions, this includes tuition, fees, books, supplies, equipment, computers, and sometimes room and board. Thus, a kids college savings can successfully be used to better his college planning. The IRS also allows tax-free withdrawals of up to $10,000 per year, per beneficiary to pay for tuition expenses at private, public, and religious K-12 schools.

Hence, the CTC improves the standards of raising your child while the 529 college saving plan improves the standards of higher education resulting in better jobs with better salaries. Hence, solving so many issues at once.