| Special for Nashville Tennessean, USA TODAY NETWORK newsrooms in Tennessee
Tax changes and suggestions affect our financial planning. Here’s an introduction to Child Tax Credit and Flat-Rate Retirement Credit.
For the past few months we’ve talked about ordinary income, capital gains, and inheritance and gifts. In this final article, we discuss two remaining points: the child tax deduction and the lump sum for retirement benefits.
Estate and gifts: https://www.tennessean.com/story/money/2021/05/17/how-president-bidens-estate-gift-tax-changes-might-affect-your-plan/5090387001/
capital gain: https://www.tennessean.com/story/money/2021/03/19/how-biden-proposes-change-capital-gains-taxes/4747019001/
Ordinary income: https://www.tennessean.com/story/money/2021/02/08/what-tax-changes-can-we-expect-biden-administration/4386592001/
While there are other suggested deductions and credits (like reinstating credit for first-time buyers or capping deductions to 28%) we will address if or when they are more likely to pass. For now, let’s focus on these two.
Child tax credit. This credit was passed with the American Rescue Plan in March 2021 along with the third round of stimulus checks. This currently only applies to the 2021 tax year and would need further legislation to continue beyond that.
How has it changed? This was previously a credit of $ 2,000 per child and has been expanded to $ 3,000 per child ($ 3,600 for children under 6 years old). In addition to being fully refundable for 2021, it’s also partially paid upfront (July through December 2021) in monthly payments with a maximum of $ 250 to $ 300 per child.
Failures? The new extended loan starts at $ 150,000 for married couples ($ 75,000 for individuals); Exits for the original $ 2,000 per child credit still stay at $ 400,000 for married couples ($ 200,000 for individuals).
Flat-rate retirement credits. (In contrast to the child tax credit, this has not yet been approved).
What is it? Our current tax law allows individuals to deduct contributions to retirement accounts (such as 401 (k) s and IRAs) from income. Biden’s proposal, however, would replace the deduction with a flat-rate credit (likely 26%, which is revenue-neutral for the federal government).
How does a 26% flat rate credit differ from a deduction? The value of a deduction increases as income increases. For example, a person with a marginal tax bracket of 37% can receive a tax benefit of $ 37 for every $ 100 that is deposited into a retirement account. And a person in the 10% marginal tax bracket would get a $ 10 benefit. Flat rate loans, on the other hand, would give individuals the same benefit regardless of tax bracket (likely $ 26 regardless of tax bracket). This works better for those in lower brackets, but worse for those in higher brackets. The main idea behind the proposal would be to encourage those in the lower classes to save more for retirement.
What does this mean for everyone who is saving for retirement? According to current law, it basically makes sense for high earners to save on traditional pension accounts (before taxes) and in lower categories on Roth accounts (after taxes). However, this proposal would have the opposite effect. Roth accounts would be more attractive to high earners (because the credit would be lower than their marginal tax rate), while traditional accounts would be more attractive to everyone else because the credit would be higher than their marginal tax rate.
While some things have already changed (like the child discount), other suggestions may not be implemented. In any event, we want to keep you informed to make decisions about how things are going.
What has changed with the child tax credit?
On March 11, 2021, President Biden’s American rescue plan went into effect. A package worth $ 1.9 trillion. In addition to the third round of incentive payments, the most important change was the expansion of the child tax credit.
What was the child tax credit?
This was originally a $ 2,000 credit for each child under the age of 17 (of which $ 1,400 is refundable).
How has it changed?
With the American Rescue Plan, this has been expanded to a fully refundable balance of $ 3,000 per child ($ 3,600 per child under 6 years old).
How much is prepaid?
From July to December, half of the credit is paid out monthly in advance. The other half will be credited after filing a 2021 tax return.
Who is Eligible?
Income exits for the extended portion of the loan for those over $ 75,000 ($ 150,000 married). The original balance of $ 2,000 per child will expire at $ 200,000 for individuals ($ 400,000 for married people).
Will it continue after 2021?
Unless future laws are passed, the extended loan is only valid for 2021 and will roll back to the previous amounts in 2022.
If you have any further questions, you can contact the Child Tax Credit Update Portal at irs.gov. You can also ask your financial advisor or ask our team for help.
Hunter Yarbrough is Executive Vice President and Financial Advisor at CapWealth. For more information on Hunter and CapWealth, please visit capwealthgroup.com.