What to Do With the $3,000 Child Tax Stimulus
The IRS announced last week that the enhanced Child Tax Credit will take the form of monthly payments to parents, which will start in July.
In a hearing before the Senate Finance Committee, IRS Commissioner Charles Rettig said the agency would be ready by July to send the monthly payments, and to that end, expects “to hire an additional 1,000 CSRs [customer service representatives] to be ready this summer with the funding provided in the ARP Act for implementation of the Child Tax Credit changes, to address potential call volume increases.”
The monthly payments would translate into approximately $250 to $300 for parents, who should start thinking about how to use it now, according to several experts.
“Once the money comes in, the emotions take over,” Tania Brown, a certified financial planner and coach at SaverLife, a nonprofit focused on saving, tells CNBC. “Have a plan of action. I would start thinking now what are their plans for the money,” she added.
The Child Tax Credit is similar to regular tax credits, as there are no rules on how to spend the funds. However, as the payments end in December, it’s best to plan now. “That’s important, especially for low-income families and those who’ve been hit hardest by the pandemic,” Natalie Foster, co-chair of the Economic Security Project, a progressive anti-poverty nonprofit, tells CNBC. “Families know what they need, and family needs change from week to week,” she adds, saying that common needs can include paying for car fixes, child care, rent, food and other expenses, CNBC reports.
According to Forbes, there are other ways parents can put these funds to best use. For example, paying off debt, building an emergency fund, investing for retirement, saving for orthodontia or healthcare expenses or saving for college.
“If you haven’t started a 529 college savings plan for your kids yet, this new Child Tax Credit money could be a great way to start,” according to Forbes. “Unlike money that you put into a 401(k) or IRA, 529 plan contributions are not deductible from your federal income taxes. However, some states offer state income tax deductions for the money you put into a 529 plan.”
Carter Seuthe, CEO of Credit Summit, tells GOBankingRates that how the monthly payments should be used really depends on the parents’ situation. “If you’ve been laid off during the pandemic or are underemployed, it may go toward basic living expenses for the child. One great use is for child care, so you can feel free to job search and eventually work,” he says. Seuthe adds that if you’re able to cover your child’s expenses, “you can put the money into a savings account that’s in your child’s name. Make sure you get a decent APY [annual percentage yield] (1% or higher) so that they’ll make a good return on it. This money can be left untouched until they turn 18, then it can be used as a ‘getting started’ fund or to help cover the cost of college.”
The enhanced Child Tax Credit is part of the $1.9 trillion American Rescue Plan Act, which President Biden signed into law last month, and which will “substantially reduce child poverty by supplementing the earnings of families receiving the tax credit,” according to a statement on the Treasury website.
The Treasury Department explains that the existing Child Tax Credit has been revised in the following ways:
The credit amount has been increased from $2,000 to $3,600 for children under age six, and to $3,000 for children ages six to 17. Previously, the credit only applied to children ages 16 and younger. Individuals eligible for a 2021 Child Tax Credit will receive advance payments on their credit, which the IRS and the Bureau of the Fiscal Service will make through periodic payments from July 1 to Dec. In addition, the credit is now fully refundable and is now extended to Puerto Rico and the U.S. Territories.
The Treasury added that it has required the IRS to establish an online portal for taxpayers to update relevant data for mid-year payment adjustments — for example, the birth of a child during 2021. “Parents need to update their information in the IRS portal if either they have a new child or they alternate with their former spouse who gets the credit and they don’t get it this year,” Tom Wheelwright, CPA and author of Tax-Free Wealth, tells GOBankingRates.
“If they take the advance payment and don’t have the children as dependents in 2021, they will have to pay back the advance when they file their tax return. It’s best to change the information on the IRS website portal now so they don’t have a surprise down the road.”
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