Stimulus Update: Child Tax Credit Checks to Hit Banks This Week. What's Your Plan?

If you don't have plans for Child Tax Credit funds, here are a few ideas to mull over.

On Thursday, millions of American families will begin to receive monthly payments as part of the American Rescue Plan, signed into law by President Joe Biden in March of this year. Families with qualifying incomes will receive $300 per month for children through age 5 and $250 per month for children ages 6 to 17. Because this is considered an advance on the Child Tax Credit, parents will be able to claim the other half when they file their 2021 taxes (amounting to $1,800 for children through age 5 and $1,500 for children ages 6 to 17). In addition, the IRS will send a one-time payment of $500 for 18-year-old dependents or full-time college students through age 24.

Will you receive the credit?

Payments are based on the parent's modified adjusted gross income (AGI), found on their 2020 tax return. Here's the breakdown:

The payment amount phases out at a rate of $50 for every $1,000 of annual income beyond these limits until the credit amount reaches $2,000.

Anyone not required to file a tax return can enroll through the IRS's Child Tax Credit Non-filer Sign-up Tool or wait and file a 2021 tax return early next year. To sign up now, parents will need to provide personal information, including name, mailing address, email, date of birth, Social Security or taxpayer ID numbers for themselves and their dependent, bank account and routing numbers, and if applicable, an Identity Protection PIN from the IRS.

Coming up with a plan

Having a plan in place can help you make the most of any funds you receive. We can't tell you what to do with your money (because only you know what you need), but we hope our suggestions will spark ideas that work for you and your family.

Pay down bills

If you lost your income due to COVID-19 or otherwise find yourself behind on bills, consider using the extra funds to pay those bills off. Getting out from under debt can help relieve stress and make the upcoming year feel more promising.

Build an emergency savings account

As 2020 so perfectly illustrates, anything can happen. When things go south -- whether it's due to job loss, illness, or a need to stay home with children -- it helps to have money put away to pay bills. The rule of thumb is that you should have enough in an emergency savings account to cover three to six months' worth of expenses. Setting a goal for an emergency fund is as easy as adding up your fixed monthly costs and multiplying it by either three or six.

Let's say you have three kids between the ages of six and 17. That means you'll receive a monthly Child Tax Credit of $750. If you were to tuck those funds into an emergency savings account, you would have $4,500 put away by the end of the year ($750 x 6 = $4,500).

Put it away for "extras"

There is no denying that kids are expensive. If you typically find yourself scrambling to find the money to pay for things like back-to-school clothes, team sports, or braces, think about how this advance on your Child Tax Credit payment can help you cover those expenses.

Build your health savings

If your kids are like most, they spend a fair amount of time in doctor's offices. This year, you can contribute up to $7,200 into a health savings account (HSA) if you are enrolled in a high-deductible health plan.

If you don't have access to an HSA, consider creating your own "medical fund." That way, you'll have money for co-pays, deductibles, and prescriptions as needed.

Invest in your child's education

529 college savings plans are easy to set up, and not typically subject to taxes when used to pay for qualified education expenses. If you haven't started saving for your kid's college education, the Child Tax Credit offers a kickstart.

As mentioned, you know best what your family needs. While the monthly Child Tax Credits are only scheduled to last through the end of the year, there are plenty in Congress pushing for them to become permanent. If they do, these first six payments allow you to figure out how the funds can best be put to use.