Last month, I wrote a blog post about the “nuts and bolts” of the advanced child tax credit (ACTC). 

To recap, the ACTC is an advance payment of half of the expanded child tax credit (CTC), available under the American Rescue PlanThe remainder of the credit gets settled up on 2021 tax returns. A tax credit is a dollar-for-dollar offset of income tax (e.g., $5,000 tentative tax – $3,000 credit = $2,000 final tax).

The six scheduled payment dates for ACTC benefits payable this year are July 15, August 13, September 15, October 15, November 15, and December 15. Most payments will be made via direct deposit. 

For 2021 only, the expanded CTC is $3,000 per child age 6 to 17 and $3,600 for children under age 6. 

The credit is fully refundable, and ACTC payment amounts in 2021 are $250 per month (children age 6 to 17) and $300 per month (age 5 and younger).

Parents will receive the full amount of the expanded CTC if their income is below $75,000 (single tax filers or married filing separately), $112,500 (filing as head of household), and $150,000 (married filing jointly). A reduced amount is available for incomes up to $400,000 (married filing jointly) and $200,000 for other filing statuses.

Taxpayers can opt out of advance payments and receive any expanded CTC they are due when they file their 2021 tax return. Good candidates for opting out of ACTC payments and waiting to “settle up” in 2022 are:

  • Taxpayers who are unsure what their total 2021 income will be and do not want to owe the IRS 
  • Taxpayers whose income increased in 2021 (versus their 2020 or 2019 income)
  • Taxpayers who prefer one large tax refund to smaller payments

For families that elect to receive ACTC payments, the next decision becomes what to do with the money? The extended CTC is currently slated for this year only, so it deserves special consideration and careful use. 

The amounts received can be significant, too; e.g., $800 per month for a family with a preschooler and two school-age children ($300 + $250 + $250). Most experts advise financial catch-up from the pandemic and set-asides for the future.

Advice given in a recent Consumer Financial Protection Bureau (CFPB) webinar and from other sources includes the following uses for ACTC payments:

Done Deal: It Is Already Spent

Some people have their ACTC payments already earmarked for overdue bills (e.g., rent and utilities) incurred during the pandemic.

There is no judgement or shame here. Their financial situation “is what it is.” Period. The money is effectively already spent and provides critical “breathing room.”

Credit Card Payoff

Online credit card payoff calculators can show the estimated payment time and interest savings available by making extra payments on a credit card.

Some people pay more on cards with the highest interest rate while others get a psychological boost by “knocking off” debts with the smallest balances first.

Emergency Savings Set-Aside

Though financial experts recommend setting aside three to six months’ of essential expenses as a financial “buffer,” any savings is better than none.

ACTC payments can boost set-aside funds that might otherwise take families with limited resources months, or even years, to accumulate.

Future Spending Needs

Expenses noted by the CFPB include credit card minimum payments, children’s school and education expenses, and after-school care.

The CFPB recommends adding ACTC payments into a family’s spending plan (budget) as expected income and planned expenses using its Cash Flow Budget tool.

Income Tax Set-Aside

Estimating tax liability is tricky in times of economic turmoil. Thus, many tax experts recommend a “save half, spend half” strategy for ACTC payments. 

If your calculations are off, money will be set aside to pay taxes due next year.

If you don’t owe more to the IRS, you will have an additional windfall.

The CFPB also warned about ACTC fraud. To learn about pandemic-related scams, review a few prudent recommendations on how to spot and stop a scam in its tracks..

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