The $ 1.9 trillion bill signed by President Joe Biden will provide direct financial assistance to parents across the country in addition to the $ 1,400 stimulus check.
The new law extends the child tax credit up to $ 3,600 for eligible families for each child under 6 years of age and up to $ 3,000 for each child 6 to 17 years old. This is an increase over the current tax credit of $ 2,000 per child.
Half of the tax credit is sent out as a monthly payment from July through December. This means eligible families can receive up to $ 300 per month for children under 6 and up to $ 250 per month for older children.
The second half of the tax credit will be considered a refund when parents file their taxes for 2021 next year.
The amount families can receive will gradually be phased out for single parents earning more than $ 75,000 per year, householders earning more than $ 112,500, and married couples earning more than $ 150,000.
While there is nothing in the law that tells how to spend child tax credit money, we’ve come up with a few ways parents can use this money to help their children financially.
6 Smart Ways To Use The Tax Credit On Your Child
1. Contribute to a 529 savings plan
Tuition fees continue to rise and many suffer from student loan debt. A 529 savings plan is an investment vehicle to make tax-free money and then spend that money on qualified educational expenses such as tuition.
The money in a savings plan for 529 can also be used for private school expenses. You could even use the money to go to a business school or vocational school program if your child decides college isn’t for them.
2. Use the money to subsidize your child care
The cost of childcare is often comparable to the cost of a college education – with much less time to save the cost.
While $ 300 a month won’t cover the average cost of daycare or preschool, it can help ease the financial burden.
Parents of elementary or middle school students could use the $ 250 monthly payments for pre- or post-school care.
3. Increase your FSA long-term care contributions
A dependent care FSA or Flexible Spending Account is a workplace benefit that allows workers to set aside pre-tax dollars for skilled expenses such as day care, child care, preschool, pre- or post-school care, and summer camp.
In addition to the expanded child tax credit, the American Rescue Plan Act increases the FSA contribution limits for dependent care to $ 5,250 for individual taxpayers or $ 10,500 for married couples filing together in 2021.
If you are professionally enrolled with an FSA for dependent care, technically you are using your pre-tax income from payroll to increase your contributions. However, the extra money you get from the child tax credit can be used to make up for a lower take-away pay.
4. Pay for tuition to prevent the Covid slide
After school closings due to a pandemic and the move to distance learning, you may find that your child has academic problems.
NWEA, an educational research-based nonprofit, found that grades 3-8 students saw math test scores fall between five and 10 percentage points in 2020 compared to pre-pandemic test scores.
Adding private tutors to your child’s education can help improve academic education. While the payments from the child tax credit are not expected to arrive in parents’ bank accounts until July, this money could be used for tuition in the summer and early in the 2021-2022 school year.
5. Pay for next year’s summer camp
The summer camp is an annual edition, but it still seems to come out of nowhere.
Depending on when your child’s tax credit is deposited into your bank account (and when your child’s summer camp requires payment), you can use the money to cover the last few weeks of camp.
However, if you miss this year, you can always put the money in a sinking fund to offset the cost of next year’s summer camp so you don’t get caught by surprise.
6. Get your children interested in investing
Parents looking to get their children off to a good financial start could use the extra money as seed capital for their children to start investing.
Starting with fractions of a share is one way to get your kids excited about investing – and you don’t have to use all of your tax credit money to buy a tiny percentage of the property in their favorite businesses.
As a bonus, start your kids wealth building early on.
Nicole Dow is a senior writer at The Penny Hoarder.