Make these smart moves with your child tax credit payments

Jul 2, 2021 | News, Personal

child tax credit

Beginning July 15th, the IRS will pay out half of the total child tax credit amounts for 2021 in advance monthly payments. The remaining child tax credit can be claimed when individuals file their 2021 income tax returns. This extra money will provide a financial boost for many families whose finances may have been negatively impacted by the pandemic. If you find yourself in the position to be on top of your personal expenses without these payments, you might consider how you can use these funds to get ahead financially. Here are five strategic ways to use the upcoming child tax credit:

1. Top off your emergency fund

While we understand you may be tired of hearing about emergency funds and their importance, the past 15 months have taught us that the more you can prepare for the unexpected, the better. Generally, three to six months of living expenses is a good place to start. If you have the bandwidth to save even more, then 12 months is the ideal goal. Many individuals and families alike had to dip into their emergency savings during the pandemic. With many employers returning back to business as usual with some extra precautions, now is the perfect time to replenish the funds you may have used last year.


2. Reduce debt

Like a tax refund, this money can be used on whatever you would like, so what better opportunity than to reduce the amount of debt you have? Reducing your debt may not only help you sleep better at night, but it can also improve your credit score and save you money on interest payments. Paying off debt can be an overwhelming process, however, taking small steps can make it less intimidating. Start off with making the minimum payments on all your loans, with any extra money used towards paying off your highest interest rate loan. Once the loan with the highest interest rate is paid off, move on to the next one and repeat. While paying off debt is not the most exciting use of extra money, financial experts agree it is one of the best uses of additional funds.


3. Maximize health savings

Contributing to your Health Savings Account (HSA) is a great way to use your tax credit. Doing so allows you to pay qualifying medical expenses tax-free and may reduce your tax bill through contributions.


4. Fund your child’s education

If the tax credit is extra money you do not need soon, why not save it for your child’s education? A 529 account is a great option to invest in your child’s future education. Use the extra funds to either start or build up your 529 savings plan. This kind of account is not subject to income tax and withdrawals are usually tax-free when used on qualified education expenses. If you need to set up an account, Vanguard has a great 529 plan comparison tool that helps you find the best one for you.


5. Opt-out of the program

Although the child tax credit stands to help a lot of families improve their financial situation, it is important to note that these credit payments are not like the stimulus payments which did not need to be paid back. These credit payments are a prepayment of 2021 taxes, which means, if you usually owe money to the IRS come tax season and accept these credit payments, you may end up having to pay more next tax season. Keeping this in mind and planning is key to ensuring you do not run into any unpleasant surprises after you file your taxes. If you usually owe money at tax time or get a very small refund, then it may be in your best interest to opt out of the advance payment program. The IRS allows you to opt-out of the program here.

Another option is to receive the credit payments but save part of it for potential payments to the IRS. Alternatively, you could increase the amount of taxes withheld from your paycheck to counteract the money you receive from the credit. This calculator gives you a helpful estimate on how much you can expect to receive in child tax credit payments.