The advanced Child Tax Credit payments have started appearing in our bank accounts and mailboxes and many people are wondering exactly what they should do with them. Frankly, it can be a tricky question to tangle with. However, there are a few options that stand out.
- Opt Out: If that first payment hit your account and took you by surprise, you can still opt out if you’d like to wait to claim the credit until you file your taxes next spring. You’ll need to visit the portal the IRS has set up here and follow the instructions provided. Who should consider opting out of the advanced credit? Families who anticipate earning more this year than last (when the credit was calculated) may end up not being eligible for the entire credit they are currently slated to receive. That could potentially throw a wrinkle in your taxes next year. Or, if you typically use a large refund to pay off debts each year, you may be surprised when your refund is less than expected. If you work with a CPA or tax preparer, it’s a good idea to get their input on what’s best for your situation
- Save the Money: There aren’t any restrictions or mandates on how this money is to be used. If you want to set the cash aside and wait to see how things work out for the rest of the year, that’s perfectly reasonable. For example, if you’re contemplating opting out, you could also keep receiving the payments but put them in a savings account until you’re more comfortable with your anticipated tax bill next spring. Once you’re confident you aren’t going to owe money back to the government, you can move forward with using the money to benefit your family.
- Emergency Savings: Yes, we ring this bell frequently. Why? Simply because it’s the foundation of a solid financial life. Emergency savings can prevent you from repeating a cycle of getting into and out of debt so frequently that it prevents you from achieving your financial goals. If you can jumpstart your emergency savings with a dedicated monthly deposit, you may find yourself entering 2022 in a much more advantageous position.
- Save for the Future… of Your Kids: The credit is coming to you because you have kids so it seems reasonable to make sure it’s going to benefit them, even if it’s down the road. Post-high school education (college, trade school, etc) can be a terribly expensive road to travel. Saving for that future expense early often pays off handsomely when it comes time to send a check to the institution Jr. attends. Look into your state’s 529 College Saving Account options and find out if they offer any state income tax incentives for contributions. I mean, saving for your child’s education by using a federal tax credit and possibly reducing your state income tax bill? That sounds almost too good to be true.
We realize everyone is in a different spot in life and could potentially use these monthly tax credit payments for a myriad of reasons. If you’d like to talk through what you’re contemplating, we’d love to help. Reach out to us as your company has communicated.
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.