FINANCE

HOW SHOULD YOU USE

YOUR CHILD TAX CREDIT?

WRITTEN BY BRENNAN HALLOCK

As a parent of two children with a third on his way, I recently received my share of the Parent Child Tax Credit enacted this spring through the American Rescue Plan. Seeing the numbers in my bank account, though, I asked myself, What should I do with this? Many other parents are asking themselves the same thing. There are parents receiving this money for whom it truly is a rescue from a dire financial situation. But there are also those for whom the money is helpful, but they don’t have to spend it on food or rent. If you are one of those parents, what should you do with this money coming into your account?

1. Use it for your basic needs:

The purpose of this plan isn’t to give people extra money, it is to keep struggling families financially stable. And there are many families still struggling because of unemployment, underemployment, sickness, and other reasons.

“The IRS goal by initiating this plan is to pay out the money in advance to help families get funds faster. It isn’t necessarily intended to help people get ahead; it is intended to keep them afloat for those that desperately need it,” explains Marc Shaffer, CFP, AIF, EA for Searcy Financial Services, Inc. in Overland Park, Kansas. “For those

with multiple children, the benefit is significant.” For these families, the best piece of advice is to use the money on family necessities.

2. Put a portion of it into sav-

ings: For those of you who aren’t out of work or struggling to feed your children, what you should do with the money may seem more complicated. The first piece of advice is to not spend all the money received. Even though this money is talked about like a gift from the government—similar to a stimulus bill—it comes with some strings attached.

Shaffer explains, “Taxpayers should be careful not to spend everything received. The maximum amount is available to individuals making $75,000 or less and married couples making $150,000 or less, with a phaseout for incomes above those thresholds.”

The IRS is using previous income information to deliver the monthly payments, but the credit owed will actually be determined by your 2021 income. This means if you’ve had a significant income change (or other significant lifestyle change) between 2020 and 2021, you could end up owing some of this money back to the IRS.

“Those that got a new job, earned more money or worked an additional part-time job to increase cash flow may find themselves owing money back to the government if their monthly payment was too high,” says Shaffer. “For these reasons, we’ve suggested that those receiving the money who don’t need it for cash flow build up their emergency fund to create a potential tax escrow in case they have to give it back.”

3. Opt out of receiving the

money: You do have the option to turn down the advance payments. This doesn’t mean you won’t receive the money, it just means you will receive it all as a discount on your taxes in 2022 instead of as checks throughout the rest of this year.

If you are concerned about being able to control your spending or would rather not deal with managing the money yourself, this may be the best option. It simplifies the process by not forcing you to determine what portion should be spent and what portion should be saved, and allows you to have the full tax discount when you file your 2021 taxes.

4. Reduce debt or increase

investments: Time is an essential piece in increasing wealth, and receiving these tax credits nearly 10 months ahead of when you would normally receive them is valuable.

“If someone has an adequate emergency fund and is sure they’ll be within the income limitations to receive the monthly payments, they should review their debt to possibly reduce higher interest liabilities and/or make sure they are taking advantage of employer benefits and matches within their retirement plan,” explains Shaffer. Paying down debt or increasing investments now instead of waiting until next year allows compound interest to work in your favor and reduce liabilities or increase assets faster.

What is the Parent Child Tax Credit?

If you don’t follow the news closely or don’t read the thousands of online articles about what is going on in our country, you may be confused about why the money even showed up in your account. Here is a brief overview of what the Parent Child Tax Credit is.

“The American Rescue Plan enacted in March increased the Child Tax Credit benefit for 2021 and directed the IRS to deliver half of the amount that families are eligible for in checks beginning in July,” explains Marc Shaffer, CFP, AIF, EA for Searcy Financial Services, Inc., in Overland Park, Kansas. “The payments are worth up to $300 per month for each child under age 6 and up to $250 for each child ages 6-17.”

In other words, taxpayers were already eligible for a portion of this money as a tax discount when they file their taxes next April, but Congress increased the tax discount and directed the IRS to pay out a portion of it monthly starting July 15.