Starting July 15, Most Parents Will Have an Extra $250 a Month. Here's What to Do With Yours
by Christy Bieber | Updated July 25, 2021 - First published on May 22, 2021
Make wise use of your extra Child Tax Credit.
When the American Rescue Plan Act was signed into law in March of 2021, most people focused on the $1,400 stimulus checks the legislation provided. But the plan did much more than that for parents.
In fact, 39 million American households will soon get an extra $250 or $300 per child per month in their bank accounts. Here's why -- and some suggestions on what to do with the money.
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Here's why more money is coming
The American Rescue Plan Act provided a greatly expanded Child Tax Credit for 2021 -- and changed the rules for how the money would be delivered.
Previously, parents could claim up to a $2,000 credit when filing their taxes, but only $1,400 of it was refundable. When a credit is not refundable, it can reduce your tax bill to $0 but not below, so you'd need to owe the IRS $2,000 or more to claim the full credit.
The American Rescue Plan Act made the credit refundable in full. It also changed the amounts paid out to:
- $3,600 per child under six
- $3,000 per child for kids six to 17
- $500 for 18-year-olds and full-time dependent students up to age 24
The IRS will also be depositing money into people's bank accounts on a monthly basis.
There are upper income limits on eligibility, though. Single filers with adjusted gross incomes under $75,000 will get the full amount, as will married joint filers with incomes under $150,000 and heads of household with incomes under $112,500. Above these thresholds, eligibility phases out at a rate of $50 per extra $1,000 in income.
Recently, the IRS announced the first payments would begin on July 15. The IRS will be depositing $250 per older child per month and $300 per child under six. Payments will continue monthly through December. This means half the total amount of the credit will be paid out by the end of the year, and parents will need to claim the rest on their taxes.
The Biden administration has proposed making this expanded credit last through 2025, but there's no guarantee legislation authorizing this will pass. Assuming it doesn't, parents can still expect an extra $250 or $300 per child in their bank accounts each month starting this summer and for the remainder of the year.
What should you do with your extra money?
When the IRS begins distributing hundreds of dollars a month into your bank account or sending you checks or debit cards, you'll have to decide how to use these funds. The right option for you likely depends on your situation. Some great ways to spend your extra funds include:
- Cover child-related expenses: Parents have faced lots of extra expenses due to pandemic-related school closures. The Child Tax Credit money is designed to help with some of those costs. If you're struggling to pay for daycare, school expenses, clothing, food, or activities for your kids, this would be a natural use for that money.
- Get more flexibility in your budget: Children are expensive, and it can be hard to cover your routine monthly costs. The extra funds could be put toward things like food or gas so you have more spare cash for other financial goals, like saving for a down payment or retirement.
- Bulk up your emergency fund: An emergency fund with three to six months of living expenses in it is crucial for anyone, but especially parents because kids tend to increase the chances of unexpected expenses. Consider putting your Child Tax Credit money into a high-yield savings account each month to save for unexpected costs.
- Invest for college: If your immediate needs are met, the monthly deposits could go a long way toward helping your child cover college costs. Consider starting a 529 account and using the money to save for future school expenses.
The important thing is to consider carefully what you'll do with this newfound cash, as it provides a great opportunity to make progress on improving your finances for the long term.
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