On July 15th, the US government is set to begin sending out child tax credits each month to some 90% of America's children.
Regardless of your political stance, you've probably heard the term "government hand up" used to replace the negative connotations associated with a "government hand out." I think this, potentially, could be one of those times when hand up is, indeed, exactly what this is.
This is an important point to make—the government was already giving parents child tax credits. The difference is that the credits were wound up in a parent's April 15th tax filing. The credit may have been aimed at helping parents get children what they need, but by wrapping it up with wages, capital gains, real-estate, and everything else that goes into our yearly taxes, it was, quite simply, lost—just another line item.
It would have been very difficult for a parent to say on April 15th, "Well kids, today the government gave me $3,000 just for you being you. What should we do with the money to benefit your life?"
But the government is changing that. Instead of a once a year tax credit that disappears in a sea of other tax credits and debits, a majority of families with children will see a monthly payment.
First, let's take a look at who qualifies, and for how much. Then, let's talk about why this matters and what you could do with it.
Children under 6 will receive $3,600/yr
Children between 6 and 17 will receive $3000/yr
Families will receive the full amount if they make up to $150,000 for a couple, or $75,000 as an individual taxpayer. The payments will be phased out above that amount, but even those who get less money will receive advance payments. The upper income qualification limits are $440,000 for couples, and $240,000 for individuals. Based on these numbers it is estimated that 90% of America's children will qualify for the credit.
We believe this represents an amazing opportunity for families to begin investing for their children. As mentioned above, it's difficult for a family to file their taxes on April 15th, receive a $3,000 tax credit, and then put that money to work for their children. That's especially true if they owe federal taxes. But—and I'm speaking very generally here—it will be much easier for parents to accept $250/month and apply it directly towards their children's future.
I've written extensively about investing with your kids. Opening an account in their name, sitting down with them, and discussing money and investing. I believe financial literacy is one of the most important lessons a parent can teach their child. With just a little time spent on economic education, a child will enter adulthood leaps and bounds ahead of their cohorts.
I sit down with my kids each month and discuss their investments with them. They've learned what owning stock means, what dividends are, what compounding interest is, and so much more.
Opening an account is easy. You can read how to do it with Stockpile here, or you can choose to open a custodial account with whatever brokerage you are currently using.
Surveys have shown that young adults today no longer expect to do as well financially as their parents. This is a stark change for America, and much of the world, where perpetual growth has always been expected. Helping children start adulthood both with a strong financial education and a strong financial footing is a worthy goal for all parents. Let's take a look at what these tax credits could mean in the future. Again, we're working on the assumption that the government monthly payments will continue beyond 2021, but even if they don't continue monthly, parents can take the initiative to apply those yearly credits on a monthly basis themselves.
It's sometimes difficult for us to wrap our heads around how much investing just a small amount over a long period of time can grow—which, coincidentally, is likely because we didn't receive a good financial education when we were young. Below is just one example of what a child tax credit could mean.
In this example we assume the maximum tax credit, as well as the amounts staying the same over time (these payments would be likely to change over time as inflation takes its toll). We also assume a 10% annual return (broken down monthly). This would be a bit high historically, but keep in mind that investing for a young child is different than investing when you are forty. It's much easier to accept higher than normal risk in a young child's long-term investments than it is when you are older, opening up the possibility for higher than average gains.
It should be obvious to all of us just how impactful this tax credit could be financially. Additionally, as a parent you will spend this time with your child educating them and determining with them the best way to move forward with the money as they become adults. It's our hope that everyone will see this change in the child tax credit as the opportunity that it is.
This post was written from the boat in Aruba. Our children are truly Wanderers, and are earning their trading chops all over the world. But aside from learning about investing, they are enjoying a lot of scuba diving, and windsurfing. A good financial education is the reason I find myself with the opportunities I have as an adult today, and I don't take that for granted. Teaching kids the value of a dollar, as well as how to make their money make more money, is something that we do every day, and you can to.
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