6 Smart Ideas for Spending Your Child Tax Credit

The $1.9 trillion stimulus bill that President Joe Biden signed into law will provide direct financial aid to parents across the country, in addition to the $1,400 stimulus checks.

The new law expands the child tax credit to up to $3,600 for qualifying families for each child under age 6 and up to $3,000 for each child age 6 to 17. This is an increase from the current tax credit of $2,000 per child.

Half of the tax credit will be sent out as monthly payments from July to December, meaning that qualifying families could receive up to $300 per month for children under age 6 or up to $250 per month for older kids.

The second half of the tax credit will be included as a refund when parents file their 2021 taxes next year.

The amount of money families are eligible to receive will start to phase out for single parents making over $75,000 a year, heads of household earning over $112,500 and married couples earning more than $150,000.

While there’s nothing in the law that mandates how the child tax credit money must be spent, we’ve come up with a few ways parents could use this money to financially benefit their kids.

6 Wise Ways to Use Your Child Tax Credit

1. Contribute to a 529 Savings Plan

College tuition continues to rise, leaving many saddled with student loan debt. A 529 savings plan is an investment vehicle to grow money tax free and then use that money to spend on qualified education expenses, like college tuition.

Money in a 529 savings plan can also be used for private school expenses. You could even use the money to go toward a trade school or vocational school program if your child decides college isn’t for them.

2. Use the Money to Subsidize Your Child Care

The cost of child care often rivals the cost of a college education — with much less time to save up for the expense.

While $300 a month does not cover the average cost of daycare or preschool, it can help reduce the financial burden.

Parents of elementary or middle school students could use the $250 monthly payments toward before- or after-school care.

3. Increase Your Dependent Care FSA Contributions

A dependent care FSA, or flexible spending account, is a workplace benefit that allows workers to put aside pre-tax dollars to use toward qualifying expenses, like day care, nanny care, preschool, before- or after-school care and summer camp.

In addition to the expanded child tax credit, the American Rescue Plan Act increases the 2021 dependent care FSA contribution limits to $5,250 for single tax filers or $10,500 for married couples filing jointly.

If you are enrolled in a dependent care FSA through work, you’ll technically be using your pre-tax income from payroll to increase your contributions. However, the extra money you’ll get from the child tax credit can be used to make up for having less take-home pay.

4. Pay for Tutoring to Prevent the Covid Slide

After pandemic-related school closures and the switch to remote learning, you may notice your child is struggling academically.

NWEA, an educational research-based nonprofit, found that students in grades 3 through 8 saw math testing scores drop between five and 10 percentile points in 2020 compared to pre-pandemic test scores.

Supplementing your kid’s education with private tutors can help with academic improvement. While payments from the child tax credit aren’t expected to hit parents’ bank accounts until sometime in July, this money could be used to pay for tutoring over the summer and into the beginning of the 2021-2022 school year.

5. Pay for Next Year’s Summer Camp

Summer camp is an annual expense, but it still always seems to hit from out of nowhere.

Depending on when your child tax credit payments are deposited into your bank account (and when your kid’s summer camp requires payment), you could use the money to cover the final weeks of camp.

However, if you miss out this year, you can always put the money in a sinking fund to help offset next year’s summer camp costs so you won’t be caught off guard.

6. Get Your Kids Interested in Investing

Parents who want to get their children off to a strong start financially could use the extra cash as seed money for their kids to start investing.

Starting with fractional shares is one way to get your kids excited about investing — and you won’t have to use all your tax credit money to buy a tiny percentage of ownership in their favorite companies.

As a bonus, you’ll be starting your children on the path to building wealth at an early age.

Nicole Dow is a senior writer at The Penny Hoarder.

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