Making the Most of Your Child Tax Credit Payments

Note to our readers: This is the third article of a 3-Part series on the Enhanced Child Tax Credit. For more information on the enhanced credit, check out the first two articles: What Families Can Expect From the Expanded Child Tax Credit in 2021 and How Will The New Child Tax Credit Impact Your 2021 Tax Return?

$15 Billion Coming Your Way!

The United States government began depositing approximately $15 billion into the accounts of parents of nearly 60 million children last Thursday. Under a provision of the American Rescue Program, the Biden administration is seeking to push aid to families who are struggling with the impact of the COVID-19 pandemic.

The American Rescue Plan expanded the Child Tax Credit for 2021 from $2,000 per child to $3,600 for each child under the age of six. For children between the ages six and seventeen, the credit has increased from $2,000 to $3,000. To get the money into the hands of families more quickly, the IRS is sending out 50% of the Child Tax Credit in the second half of 2021. For more on the enhanced Child Tax Credit (click here).

It is estimated that up to 90% of taxpayers will qualify for at least a partial payment. For a married couple earning a combined income of $60,000 per year with two children under the age of six, their Child Tax Credit will equal $7,200, and that translates into an additional $3,600 in payments coming in the second half of 2021.

Approximately 86% of the families who received payments received them by direct deposit. The remaining 14% are scheduled to receive checks in the mail. The payments are scheduled to be made on July 15, Aug. 13, Sept. 15, Oct. 15, Nov. 15, and Dec. 15.

Making The Most of Your Payments

If families really want to make the most of this small windfall, we suggest putting that extra cash into a Roth IRA or 529 Plan for your children. While the extra few hundred dollars a month may help, families will easily consume the extra money without carefully planning how to allocate the additional cash.

The other thing to keep in mind is that this advance is likely to reduce the tax return that you will receive next tax season (click here). So families need to be mindful that today’s deposit is reducing their future tax return.

The Roth IRA as a great option for families who may traditionally struggle to set aside savings for retirement. The Roth IRA is an individual retirement account that can invest in individual stocks, bonds, mutual funds, ETFs or annuities. The main tax advantage of the Roth IRA lies in the fact that it provides tax-free growth and tax-free distributions of that growth. We describe the Roth IRA as our “Never-To-Be-Taxed-Again Bucket” in our financial planning modules.

Roth IRA deposits come from post-tax money, meaning the taxes have already been paid on that money, and this allows the investment to grow tax-free and come out tax-free in retirement. If you would like more information on this, reach out to our office and request a copy of our Tax-Efficient Retirement Planning Guide.

One thing to keep in mind is the income limitation on Roth IRA contributions. If you are unmarried and your income is above $125,000, or if you are married, filing a joint return with your spouse and your combined income is above $208,000, you are not eligible to contribute directly to a Roth IRA. For married couples filing separate returns, the contribution is essentially eliminated, as the maximum AGI for either spouse is $10,000. If your income is above these amounts, you will want to make a non-deductible contribution to your traditional IRA and then roll that contribution over to a Roth. There are a few moving parts with the “back-door” Roth maneuver, so you may want to reach out to our office to understand the implications of this maneuver.

A second option worth considering is a 529 Plan. 529 plans are another tax-advantaged vehicle that are designed to encourage parents and grandparents to save for their children’s future higher education expenses. Contributions to 529 college savings plans are also made with after-tax dollars, so they capture tax-free growth and tax-free withdrawals when the money is used for qualified educational expenses.

529 Plans can be used to save for future college or K-12 expenses, but we encourage parents to consider them for younger children. The potential for tax-free growth diminishes as your children age, so the greatest tax benefits accrue to the plans that have the most amount of time to grow.

While you won’t get a federal deduction for your contributions, some states offer a tax deduction on the state tax return. Illinois for example allows taxpayers to deduct the first $10,000 ($20,000 if married and filing a joint return) of contributions made specifically through the Bright Start or Bright Directions 529 programs.

If you would like additional information on how these savings vehicles can help you or your children, reach out to us for a free 10-minute consultation.

This content is developed from sources believed to be providing accurate information, and provided by Monotelo Advisors, Inc. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.