President Joe Biden’s American Rescue Plan Act of 2021, signed into law in March 2021, provides $1.9 trillion of new Covid-19 relief spending. The stimulus package provides another round of $1,400 stimulus checks, aid to state and local governments and other provisions to help America recover from the pandemic.
One of the most intriguing parts of this new legislation is the expanded Child Tax Credit, or CTC, which could put monthly payments into the hands of parents across the U.S. as soon as July 2021.
If you have children under the age of 17, you may qualify for $250 to $300 per child, per month, in direct cash payments as part of this expanded Child Tax Credit. This new benefit is projected to lift nearly five million American children out of poverty, but even for families that are more financially comfortable, it could be a welcome source of new funds to help save for college, save for retirement or pursue other financial goals.
Learn more about the expanded Child Tax Credit, how it will work and how best to use your new Child Tax Credit payments.
Featured Partner Offers
1
TurboTax Deluxe
$69
$64
2
TaxSlayer Premium
$57.95
$44.95
3
Cash App Taxes
$0
$0
Expanded Child Tax Credit: $3,000 or $3,600 Per Child
The American Rescue Plan is expanding the Child Tax Credit from its previous level of $2,000 per child to $3,000 per child ages six to 17 and $3,600 per child under age six. Children ages 17 and younger are now fully eligible for the Child Tax Credit—it used to be limited to children ages 16 and younger.
It’s not just the additional amount of this tax credit that’s noteworthy. For the first time in history, the federal government will send this money directly to eligible families as an advance payment of their 2021 tax credit. These monthly payments provide up to $300 per child from July 2021 through December 2021. In the same way that people have gotten used to receiving stimulus checks and direct deposits during the pandemic, the American Rescue Plan will help put money directly into the bank accounts of American parents during the second half of 2021.
The IRS is reviewing implementation plans for the new law. It plans to announce more details about a new online portal, where taxpayers can update their family’s data and get more information about when and how they will receive their Child Tax Credit payments.
Depending on the age of your children and your household income level, your family could receive a significant monthly infusion of cash. For example, if you have two children under the age of six, you could receive $300 per month per child ($600 per month) for a total of $3,600 from July through December 2021. You can claim the remaining credit on your 2021 tax return. You qualify for the full Child Tax Credit if you’re a single filer with a modified adjusted gross income (MAGI) of $75,000 or less or a married couple with a MAGI of $150,000 or less.
Keep in mind that this Child Tax Credit is not entirely “new money.” Monthly payments you receive between July and December 2021 are considered a 50% advance payment on your Child Tax Credit that you would get when filing your 2021 tax return during the 2022 tax season. The American Rescue Plan, according to the U.S. Department of The Treasury, is intended to get this money into people’s pockets as soon as possible to “allow struggling families to receive financial assistance now, rather than waiting until the 2022 tax filing season.”
If you expect to receive expanded Child Tax Credit payments, you can start planning now to put that money to good use.
Estimate your child tax credit payment
How to Use Your Child Tax Credit Payments
If your family has a qualifying level of modified adjusted gross income and two kids between the ages of six and 17, you will receive $500 per month ($250 per child) for each of the last six months of 2021. That’s a total of $3,000 headed your way.
For families struggling financially, this extra money can be a financial lifeline and a predictable monthly income source to help pay bills. But if your family already has some financial stability, you can use this money for a variety of longer-term financial goals.
Here are six ideas for what to do with your money Child Tax Credit payments:
1. Pay Off Debt
If you have any credit card debt, medical bills, auto loans or other debt that you have wanted to pay off, this additional monthly windfall could be an excellent way to accelerate your path to being debt-free. Consider using a debt payoff calculator to see how much faster your debt can disappear with an extra $250 to $300 per month per child.
2. Build an Emergency Fund
Many Americans have been aggressively saving money during the pandemic. In case your emergency fund is not yet at the level where you would like it to be, you can put that Child Tax Credit money into your savings account and watch your rainy day fund grow.
If you already have a decent amount of emergency savings, you may want to keep some extra money in cash for other savings goals.
3. Invest for Retirement
Receiving monthly income from the Child Tax Credit gives you extra room in your budget to save more money for retirement.
If you have a 401(k) or another employer-sponsored retirement savings plan at work, adjust your contributions to add more money to your account equal to your monthly Child Tax Credit each month. Your take-home pay gets balanced out by the monthly Child Tax Credit payment.
If you don’t have a 401(k) at work, or if you are already receiving the maximum employer match, you may want to consider putting the money into a traditional IRA or a Roth IRA. The maximum contribution limit for all of your IRAs is $6,000 per year in 2021 ($7,000 if you’re age 50 or older).
If you have two kids between the ages of six and 17, you’ll receive $3,000 in 2021 that you could put into an IRA and invest for your retirement on a tax-advantaged basis. That’s enough to meet 50% of the annual contribution limit for one parent’s IRA.
4. Save for College
If you haven’t started a 529 college savings plan for your kids yet, this new Child Tax Credit money could be a great way to start.
Unlike money that you put into a 401(k) or IRA, 529 plan contributions are not deductible from your federal income taxes. However, some states offer state income tax deductions for the money you put into a 529 plan. For example, in New York state, married couples filing jointly can deduct up to $10,000 of their 529 plan contributions when filing their state income taxes.
5. Save for Orthodontia and Healthcare Expenses
If you have a high-deductible health plan (HDHP), you may qualify for a Health Savings Account (HSA). This is a tax-advantaged savings account that lets families contribute up to $7,200 in 2021 for qualified medical expenses, including dentistry, orthodontia, therapy and learning disability treatments. If you have a child who needs braces, or if your child has any other medical needs or special education needs, you could put that Child Tax Credit money into your HSA.
6. Do Something Fun as a Family
Many families have been cooped up at home during the pandemic. If you’re longing to travel, this extra Child Tax Credit money could help pay for your next family vacation.
If you’ve wanted to buy a new car for your family and take a road trip, six months’ worth of Child Tax Credit payments for two kids in their teens could help generate a $3,000 down payment on a new vehicle. Don’t assume you have to save every dollar of this money—it’s natural to want to celebrate better times ahead by indulging in some pent-up consumer demand.
Compare the best tax software of 2024
Bottom Line
The American Rescue Plan is changing the way the Child Tax Credit is delivered. Instead of waiting until 2022 to file taxes and (hopefully) get a refund, millions of American parents are going to start seeing monthly per-child payments arriving in July. Not only does this plan have the potential to cut child poverty nearly in half, but it also may recalibrate the way Americans think about supporting families and help create a stronger safety net for children to grow and thrive.
If you’re a parent who has been struggling financially during the pandemic, this Child Tax Credit money can be significant additional cash flow to help you pay your bills and rebuild your monthly budget. If you’re already saving money and investing for college and retirement, this Child Tax Credit cash can help you strengthen your family’s foundation for the future.
