In July, the first of six monthly child tax credit payments went out to more than 35 million households with about 60 million kids, according to the IRS.
The money is an advance on a 2021 credit and is an enhancement of the existing child tax credit. For 2021, the credit increases to $3,000 from $2,000 per child under the age of 17 and gives an additional $600 benefit for children under the age of 6.
Unless they opt out, most families will get half of the credit in monthly payments of $250 per month for children between the ages of 6 and 17 and $300 per month for those under the age of 6. In July, the average payment sent to families was $423, according to the IRS.
The full credit is available for all children ages 17 and under in families with 2020 or 2019 adjusted gross income of less than $75,000 for single parents and $150,000 for a married couple filing jointly, and ends for individuals earning $95,000 and married couples filing jointly making $170,000, though they'd still be eligible for the regular child tax credit.
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Roughly 90% of families in the U.S. will get the child tax credit and the advance payments, according to the IRS. While the expansion is targeted at helping the lowest-income families, it is also a significant boost for middle-class Americans who have been hit by the coronavirus pandemic.
For many families, the extra money will be used to catch up on bills, pay for household expenses such as utilities and food, or buy new school clothes and other essentials for children. But others may have an opportunity to save or invest the money to use for their children in the future.
"The first thing you have to do is gauge 'Are my household essentials taken care of?'" said Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan. Once you've determined that you're OK in terms of day-to-day expenses and also have a solid emergency fund handy, you can begin to look at other things to do with the money, such as invest it to get ahead, he said.
Here are some ideas experts suggest for helping to grow any child tax credit payments you receive.
Invest in a college savings plan
One great way to use the extra money is to put it into a 529 college savings plan. Most states offer such plans, and if the money is used for approved education expenses, it can grow and be withdrawn tax-free.
"We know a lot of families are just struggling day to day, but there are also families who have the ability to really plan and use these resources for the future," said Mary Morris, CEO of Virginia529 and ABLEnow.
The money in a 529 account can be used before college, although there's a $10,000 per year withdrawal limit for elementary, middle or high school expenses. And, even if your child doesn't go on to higher education, the account can generally be passed to another beneficiary. This could be a sibling, parent, niece or nephew.
In some states, there may also be tax breaks for money deposited in a 529 plan.
"Using these tax credits is a good way to just get started," she said, adding that some people contribute small amounts over time, such as $50 per month. While that's not a large amount, it adds up over time and grows exponentially because it's generally invested in the stock market.
"If you really don't need it immediately, you can really do something significant," she said.
Open an ABLE account
If you have a child with a disability, you could also save some of the tax credit money in an ABLE account, which is a tax-advantaged savings program for eligible people with disabilities.
Like a 529 college savings plan, families can save in the accounts and withdraw money tax-free when used for qualified disability expenses such as care, education, living expenses, food and more.
Starting to save in such an account early can help parents manage expenses later, especially for children, including adult dependents, who are not able to be independent.
"It gives you a head start, and you can develop some resources," said Morris.
Even if you have a disabled child who can later become independent, an ABLE account may still be a good idea, she said.
Having an ABLE account for an individual with a disability can be a huge help in ensuring that they can still access other federal aid programs. That's because money in an ABLE account does not count towards many of the means tests that can limit eligibility for individuals with more than $2,000 in resources, such as savings accounts, retirement plan or other liquid assets.
Save in an investment account
Parents could also put the money into their own brokerage account, or if they have earned income, an individual retirement account, such as a Roth IRA, and make their child the beneficiary. This way, you can invest the money in the stock market and start earning returns on the investment, said Foguth.
He suggests parents look to things such as index funds, mutual funds and exchange traded funds to invest with lower risk over the long-term. Doing this helps save for later, and will also help you outrun inflation, which has ticked up and eroded spending power lately.
"You're most likely not going to double your money in a few months," he said. "But if things stay normal, you're going to progressively be moving in the right direction in significantly higher opportunities than the bank."
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