Thanks to the American Rescue Plan, about 39 million American households — covering about 88 percent of all children in the United States — are now privy to an enhanced child tax credit. In fact, the government has just stated that these payments will begin to be dispersed to families in July, which makes it a great time to cover what to expect from this 2021 Child Tax Credit and what you should do with it as you get it.
Here’s a closer look:
The 2021 Child Tax Credit Explained
As a refresher, the enhanced child tax credit will provide extra payment to American families with dependent children who are 17 and under. For children who are ages 6 to 17, the tax credit will increase up to $3,000 per child. And for families with children under six, the tax credit increases up to $3,600 per child. This is up from the $2,000 that families typically receive per child. But one unique thing about this enhanced credit is that qualifying families don’t have to wait until tax season to take advantage of it. This summer, the government will begin sending out $250 monthly checks to families with kids 6-17 and $300 monthly checks to families with children under 6.
While families can opt out of receiving monthly payments and instead receive the lump sum come next year’s tax season, whether you’re taking it now or in the future, it’s wise to have a plan for what to do with it. We’ll cover that in our next section.
What Should You Do with Extra Child Tax Credit
So what should you do with the extra money you’re due to receive from the child tax credit? If you’re struggling to make ends meet, you should absolutely use the additional funds to do just that. Purchase groceries, pay down debt, get ahead of some bills even. But if you’re not counting on the money for necessities, there are other smart ways to use this money. Here’s a look at some of them:
- Boost your emergency fund: Ideally, you should have an emergency fund sufficient enough to cover 3 months’ worth of living expenses in the event of the unthinkable. If yours is running short, consider boosting it with these additional funds.
- Invest it back into your children: Start an IRA or a 529 college savings plan for your child with the money that their existence is essentially getting you this year. By investing it in the market in this way, you can continue to build upon such an account so that it continues to grow year over year.
- Get ahead on debt: Are you carrying any high-interest debt? If so, it makes sense to prioritize paying this off in the short term to save more money in the long term. Any debt that’s accruing at greater than a 5 percent interest rate should be prioritized.