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What's the best thing to do with your child tax credit?

Should you spend your 2021 child tax credit advance, or find ways to save it or invest it?

Marko Geber | DigitalVision | Getty Images

In just a few short months, qualifying families will start receiving their monthly payments from the U.S. government through the 2021 Child Tax Credit.

The monthly payments — $250 per child age 6 to 17 and $300 per child under 6 — are coming in advance of next year's tax season thanks to the American Rescue Plan Act. This influx of up to $3,000 total (or $3,600 for families with young children) in extra cash per child will make life easier for lots of American families this year.

An additional $250 or $300 per month might be enough to make a noticeable dent in your family's budget. You could plan to use the credit to cover groceries, pay down overdue utility bills, buy new summer clothes or even give your savings account a boost. But if these basic needs are covered, and you have some flexibility about how exactly you'll use the money, there are ways to take the $3,000 even further.

Select spoke to Brent Weiss, CFP, chief evangelist and co-founder of Facet Wealth, about ways you can optimize the child tax credit payments in 2021.

How to make the most of your child tax credit

Weiss outlined four steps to help you start planning on what to do with additional cash you'll get with the child tax credit payments: 

  1. Determine the amount you qualify for
  2. Know when you're getting the money
  3. Check your financial foundation
  4. Look at the big picture

Determine the amount you qualify for

The amount you're eligible for will vary based on your adjusted gross income (AGI), the number of children you have and their ages.

Parents who earn at least $2,500 annually traditionally qualify for a $2,000 credit for each child under 17 (though the temporary changes instituted by the American Rescue Plan waive the $2,500 earning requirement.) The 2021 child tax credit will temporarily increase the amount of money parents get to $3,000 per child age 6 to 17 and $3,600 per child under 6.

Benefits start phasing out at $75,000 for single filers, $112,500 for heads of household and $150,000 for married couples filing jointly. (This is reduced for 2021; normal caps start at $200,000 for individuals. Parents who aren't eligible for the higher credit will still be able to claim the traditional child tax credit of up to $2,000 per child, granted they meet the eligibility requirements.)

Your qualification status will be based on either your 2019 or 2020 tax return information, depending on if you filed your 2020 taxes at the time payments are disbursed. Use this free child tax credit calculator to see how much you're eligible for.

Know when you're getting the money

"Don't make the mistake of thinking this is a lump sum," says Weiss. "Half of the amount is paid monthly from July through the end of the year. The other half is paid when you file your 2021 tax returns in 2022."

So if you qualify for $3,600, half is paid monthly for 6 months:

$1,800 / 6 = $300/month

The other half is paid when you file your tax returns for 2021 in 2022.

Check your financial foundation

"The most important thing you can do for your family is to create a solid foundation," says Weiss. That includes a proper emergency fund, a plan for paying down debt and the right insurance.

"Your financial health, just like your physical and mental health, is essential to living well. And having a plan for your money helps you see all of your options and make smart decisions that support the life you want," Weiss says.

Here are Weiss' three steps to secure your financial foundation:

  1. Check cash flow: Make sure you can cover your essential monthly expenses. Having positive cash flow — spending less than you bring home each month — is like the fuel for your car. If there is no gas left in the tank, the car can't go very far.
  2. Plan for the future: Start by looking at your emergency fund. Then, move on to any high-interest debt, and, finally, set aside cash for expenses coming up in the next 12 months.
  3. Build wealth: With positive cash flow and a good foundation in place, now you have the power to choose how you use your money. Start looking at ways to invest for the future of your family. This can be in your 401(k), IRA or even a college 529 plan for your child.

And Weiss adds one bonus tip: Don't be afraid to invest in yourself.

"You may decide that an investment in advancing your career may pay the best dividends," he tells Select. "Maybe it's a class to learn a new skill or to earn a certification. Maybe it's a life or professional coach. The point is to use the money to help you level up to the life you want. After all, finding a way to make an extra $3,000 per year will pay better dividends than a one-time tax credit (although we would all take both!)."

The power of small steps

You can put aside $20 per week in order to save $1,000 in a year. Double that to $40 per week (or $160 per month), and you'll save $2,000 — or roughly two-thirds of your total child tax credit amount.

The best savings accounts don't require a minimum balance to open, like the Marcus by Goldman Sachs High Yield Online Savings, the Synchrony Bank High Yield Savings and the Varo Savings Account.

Look at the big picture

"Take a moment to think about your priorities personally, professionally and financially, says Weiss. "I call this the big picture — looking at your entire life, not just your money."

Write down what you want to achieve in the coming year, then prioritize those goals, Weiss suggests.

"This will help you be intentional with your money. You may very well put it toward a financial obligation — emergency fund, debt, monthly bills, investments — but it doesn't have to be the only thing."

What are the best ways to use the child tax credit? 

If you need some help prioritizing, Weiss suggests the following checklist to get started:

  • Spend: Start with the essentials (rent or mortgage, debt payments, monthly bills) before moving on to other things. If your basics are covered, start a fund for another big purchase, such as a vacation. It's OK to spend some of the money on you and your family. It's been a hard year for everyone, and it may be good for your mental health to get away for a bit, even if it's just for a long weekend.
  • Save: If you aren't quite sure what to do yet and your financial situation is stable, it's OK to just hold cash for a bit. Simply save the money (ideally in an interest-bearing account such as a high yield savings) until you have a solid plan to use it.
  • Invest: This could be a great opportunity to save for your child's future. Tax credits are the result of having children, so it would be wise to consider opening and investing in a 529 savings plan for their future education-related expenses. You can get started with as little as $25 per month. Then, if it makes sense, look at other investments. Use the money to boost your 401(k) contributions or maybe to fund your IRA. Do this only after you have a solid financial foundation in place.

Information about Marcus by Goldman Sachs High Yield Online Savings and Synchrony Bank High Yield Savings Account has been collected independently by Select and has not been reviewed or provided by the banks prior to publication. Goldman Sachs Bank USA is a Member FDIC.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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