Checks That Could Change Your Financial Life

Beginning in July, most families with children will begin receiving monthly payments of up to $ 300 per child as part of the expansion of the American Rescue Plan Child Tax Credit.

Payments are expected to end in December and it is not clear whether they will be extended. But even six months of payments could make a big difference in the finances of many families.

For some, the money will be a lifeline to pay for rent, food and other essential expenses. For others, cash could be a chance to make lasting changes that could help them become more financially stable.

Bigger and better credit

the child tax credit dates back to 1997 and began with a $ 500 credit designed to provide some tax relief to middle and upper income families. Over the years, Congress has expanded the size of credit and made it available to low-income people as well. In 2017, the maximum credit was increased to $ 2,000 and the income limits were increased to $ 200,000 for single filers and $ 400,000 for married couples, after which the credit is phased out.

The American Rescue Plan increases maximum credit, but not for everyone. The new law adds $ 1,000 for children aged 6 to 17 and $ 1,600 for children under 6. But the extra amounts are starting to disappear for single tax filers with adjusted gross income over $ 75,000 and married couples over $ 150,000. The credit is reduced by $ 50 for every $ 1,000 of income over these limits.

Taxpayers who are phased out of the extended credit may still be eligible for the initial $ 2,000 credit, although, again, the credit is reduced by $ 50 for every $ 1,000 of income over the 2017 income limits.

The new law makes two other important changes. The credit is now fully refundable, which means more families can get a refund if their credit amount is more than the tax they owe. In addition, half of the credit will be paid in monthly installments from July to December. The other half can be claimed on the taxpayer’s 2021 return, to be filed next year.

IRS will determine if people are eligible for monthly payments using their 2020 tax returns or, if these have not yet been filed, their 2019 returns, says financial planner Robert Westley, a member of Financial Literacy Commission of the American Institute of CPA. .

How to use the money

You know better what your family needs, but whoever doesn’t emergency fund should consider starting one, says Jennifer Tescher, founder and CEO of the Financial Health Network, a nonprofit that promotes financial stability for low- and middle-income people.

A savings account with only a few hundred dollars is often enough to break the paycheck cycle.

“Most of the unexpected expenses that people face are actually in the range of a few hundred dollars,” Tescher says.

Most low- and middle-income families earn enough money to cover their expenses, but there is often a cash flow mismatch between when they need the money and when it arrives, Tescher says. This can lead to late fees, bank overdrafts, utility shutdowns, and other unpleasant consequences.

“Then getting out of the mess is time consuming and expensive,” says Tescher. Tapping into an emergency account and then replenishing it can fill these gaps.

Other ways to improve your financial health

Once you have an emergency start-up fund, you may want to pay off payday loans, credit cards, and the like. costly debt, Westley said. The less interest you have to pay on the debt, the more money you have for the uses you choose.

People could also start or increase their retirement savings, either by contributing to an individual retirement account or by increasing their contributions to a work plan such as a 401 (k). Although the tax credit money cannot be put directly into a corporate plan, you can use it to replace contributions that flow from your paycheck.

You might want to save some money for a down payment, as homeownership is a common way to build wealth. You could also improve your children’s future financial health by saving for their education. Contributing to a 529 college savings plan can provide tax-free money for education, and many states offer tax relief or other incentives.

If you do not yet have health insurance, monthly payments can help you pay the premiums for policies taken out on the Affordable Care Act Exchange at The US bailout passed in March also increased subsidies, and other improvements reduced the cost of most policies. Health insurance can help you avoid going bankrupt on your medical bills if a family member becomes ill or injured.

Having a plan for the money before it happens can help you make sure the money goes where you want it most, says Tescher.

“Research from the Financial Health Network has consistently shown that planning ahead and identifying specific financial goals is strongly linked to better financial health regardless of income,” says Tescher.

This article was written by NerdWallet and was originally published by The Associated Press.

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