What Financial Advisors Need to Know About Child Tax Credits

As tax policy takes center stage on the campaign trail, the child tax credit has emerged as a key topic of discussion. With proposed changes and expanded benefits, it's essential for financial advisors to guide clients on how to maximize the benefits of child tax credits – regardless of political outcomes. This blog will outline what financial advisors should know about the child tax credit and how it impacts financial planning for families.

1. A Brief Overview of the Child Tax Credit

The child tax credit has been an integral part of American tax policy for over two decades. Initially offering $500 per child in 1997, it has grown to $2,000 per child, with occasional expansions. Financial advisors must stay updated on potential changes, especially in an election year where both major parties are discussing further expansions. The COVID-era increase to $3,600 per child briefly reduced child poverty and provided key insights into how these policies affect household financial health.

2. Current Eligibility and Benefits

Financial advisors should ensure clients understand the current eligibility requirements for the child tax credit. For 2023, the credit provides up to $2,000 per qualifying child under the age of 17. The credit is phased out for high-income families and is partially refundable, meaning that eligible families who owe little to no tax can still receive a portion of the credit as a refund.

3. Potential Changes on the Horizon

With both political parties discussing adjustments to the child tax credit, financial advisors need to monitor any policy changes that could affect tax planning strategies. Proposals like the return of the COVID-era expanded credit, which could offer up to $6,000 for families with newborns, or an alternative suggestion of a $5,000 credit per child, could significantly change the tax landscape. While it's too early to predict the outcome, advisors should be prepared to adjust financial plans if new legislation passes.

4. Tax Planning Strategies for Clients

Clients can benefit greatly from effective tax planning around the child tax credit. Here are some strategies financial advisors should consider:

• Maximizing Refundable Credits: For low-income families, the refundable portion of the credit can provide essential financial support. Advisors should guide clients through eligibility criteria to ensure they claim the full benefit.
• Income Phaseout Thresholds: High-income families may be subject to phaseouts. Advisors should work with clients to explore strategies that might reduce taxable income and keep them under the phaseout threshold.
• Planning for Potential Future Expansions: Advisors should prepare for possible future expansions by considering how increased credits may fit into a family's broader financial goals, including savings for education or retirement.

5. The Long-Term Impact of Child Tax Credits on Clients’ Financial Health

Child tax credits have been shown to reduce poverty and improve financial stability for low-income families. According to research done by Anna Aizer, an economics professor at Brown University, tax credits also lead to better health and educational outcomes for children. Financial advisors should frame child tax credits not just as a tax-saving measure but as part of a comprehensive plan for enhancing family well-being.

Helping Clients Navigate the Child Tax Credit

Financial advisors play a key role in helping families maximize the financial benefits of child tax credits. By staying informed of current policies and potential changes, advisors can guide clients through effective tax planning, helping them secure their financial future.

Learn how Enrich’s FINRA-reviewed tools help financial advisors educate clients on child tax credits, market trends, and long-term planning for better financial outcomes.