Some parents are seeing the advance Child Tax Credit hit their bank accounts, but there could be caveats when it comes time to file tax returns.
For parents receiving the advance Child Tax Credit payments, that extra padding in the bank may seem pretty appealing.
Although the money may be a relief for many right now, it’s important to remember it’s not free cash.
This year, the IRS began paying parents who opted in half the total Child Tax Credit amount via advance monthly payments. The other half will be claimed when parents file their 2021 income tax return.
It’s part of the American Rescue Plan Act, designed to assist in the United States’ recovery from the economic impact of the COVID-19 pandemic. The Child Tax Credit has been broadened to include more families, and the financial benefits it provides have been increased.
“Ordinarily, you would’ve had to wait until you file your taxes to get the credit, so you’re essentially getting your refund sooner than you would’ve up to half,” said Jay Lewis, a financial coach with Empower People, Empower Change. “Not only that, but for certain incomes, they give you more than they would have. In the maximum, for example, instead of $2,000 … now for those who are under the age of 6, it should be $3,600, and that includes babies who were born this year. For children ages 6 to 17, (parents) get $3,000.”
For parents, that means up to $300 each month for each child under age 6, and up to $250 a month for each child ages 6 to 17.
To claim the Child Tax Credit, there are seven requirements that must be met to determine if your child is eligible: age, relationship, support, dependent status, citizenship, length of residency and family income.
But Lewis reminds parents this isn’t free cash.
“People have to be careful, because it’s not like this money doesn’t count toward your tax return,” he said. “It’s not just free money. That’s a big misconception people need to be aware of. Ordinarily, your Child Tax Credit should help if you owe taxes or if you’re in a position to where you don’t feel like you’re getting a lot back.”
Lewis recommends parents speak with a tax professional. The goal should be to balance withholdings to where parents are neither owing much money nor getting a lot back at the end of the year.
He also recommends that parents who opted in for advance Child Tax Credit money have a plan for it.
“COVID has impacted so many people,” he said. “I would say if you’re still struggling with debt and don’t have any amount of money saved up for an emergency, that money could be helpful right now. … Some people, I know, will probably need that money just to try to survive on right now. But don’t be lax. … Definitely get on a budget and start saving money.”