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Carla Fried: Plan ahead for monthly federal payments to families with children

For many American households, the child tax credit payments will provide much-needed help in paying for core household needs.  (Tribune News Service)
For many American households, the child tax credit payments will provide much-needed help in paying for core household needs. (Tribune News Service)
By Carla Fried Rate.com

Families with minors are in line to see a major boost in their checking accounts starting in July. The federal government starts sending monthly checks of $250 to $300 per child to single parents with income below $75,000 and married couples filing a joint tax return with income below $150,000. At higher income levels, benefits are reduced and eventually phase out.

Child tax credit check direct deposit

The payments are part of the child tax credit, CTC, which has been around since 1997. But the American Rescue Plan passed in March, delivers upgrades for 2021. The maximum annual per-child value increases from $2,000 to $3,000 (each kid, ages 6 to 8) or $3,600 (under age 6).

The Tax Policy Center estimates that 92% of families with children will receive an average total credit of nearly $4,400 for the 2021 tax year. In the past, the CTC was a benefit you collected when you filed your federal tax return.

From July through the end of 2021, the credit will instead be delivered as a monthly payment direct-deposited into your bank account. That covers six months of 2021; the other six months will use the old system: a credit when you file your 2021 federal tax return in 2022.

One catch: You need to file your 2020 tax return to be eligible for the monthly checks.

Calculate your family’s monthly child tax credit

Plug in “2021 Child Tax Credit Calculator” into your web browser and you will land on links for free tools that will quickly tell you the expected size of your 2021 household child tax credit. If your household qualifies for the maximum 2021 payout, divide that by half. That’s what you can expect to receive in bank deposits between July and the end of the year.

For a family with two kids under 6 that qualifies for the maximum, that’s $3,600 that will show up in your account. (Half the $7,200 annual credit.) Got two young urchins and one more between the ages of 6 and 17? You will get a total of $5,600 in cash between July and the end of the year. (Half of the $10,200 total CTC for 2021.)

These payouts are authorized for just 2021. The Biden Administration has signaled it wants to extend the higher payouts. We’ll need to wait and watch if Congress steps up to the plate. If nothing is done, 2022 payments will revert to prior levels (max of $2,000 per kid 16 and younger, as a credit when taxes are filed).

How Americans are using federal stimulus

For many households, the CTC payments will provide much needed help in paying for core household needs. But if earlier stimulus payments are any guide, essential spending is not the major or only use.

The Federal Reserve Bank of New York reported that about 25% of the two most recent stimulus checks (January and March ) were spent, and that on average 16% of the January check went to essential spending, 6% was spent on nonessentials and 3% went to charity.

Households used a bigger chunk to tackle financial goals. More than 40% of March checks went to savings, and another 34% went to pay down debts.

What’s your CTC spending plan?

The CTC payments are larger and also occur as the spending economy is reopened, with more Americans vaccinated. Travel is more accessible, restaurants and bars are reopening, and the mall is back for those sick of online shopping. Tempting nonessentials.

Some nonessential spending is good for your mental health, but CTC checks are also an opportunity to save and repay debt. Committing to a CTC spending/saving plan before July ups the odds you will not lose your financial goal momentum. Consider automating what you want to save from your CTC check.

For instance, if your household will be getting $500 a month starting in July, and you want to use half to build your emergency fund, in June change your auto-deposit into your emergency fund – you already use auto deposit from checking to savings, right? – by $250.

Been eager to fund a Roth IRA? You can fund one with monthly direct transfers from your bank account into your IRA account.

For all the mothers who bore the brunt of keeping the trains running in their household during the pandemic, the CTC checks may be a vitally important opportunity to get help. Once you calculate the checks you’ll be receiving, consider what sort of child care or household help it might enable you to hire. That, most definitely, falls under the category of essential spending.

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