Windfalls: Spend or Save?

Remember the Child Tax Credit that I told you about a couple of weeks ago? Those direct deposits will be hitting bank accounts this week, and you may already be planning a shopping spree with your extra cash.  Is that really a good idea? Let’s dig a little deeper into the details of this credit, and its payment structure before deciding how to best move forward after the deposits start coming in.  

Parents of children who are eligible to receive the payments outlined in the 2021 Child Tax Credit plan will be receiving deposits each month between July and December. The amount will depend on the household income, the number of qualifying dependents, and their age as of December 31, 2021. Parents with children aged 18-24 who are dependents (or full-time college students) will receive a one-time $500 deposit. For those with younger children, the end-of-year deposits will total between $1,500 and $1,800 per qualifying child, with the remainder appearing as a credit at tax time.

I don’t know about you, but to me, that’s a lot of money! While it is tempting to spend it right away, I am going to suggest that you reconsider. This credit is determined by your most recent tax filing, so if you owed taxes last year, or if you end up making more during 2021, there is a potential that you may end up owing taxes again next year. In fact, many people are opting out of the payments for that reason.

It is a little too late to opt out entirely, meaning you will still receive at least the first direct payment, but parents can still choose to opt-out of future payments. If you prefer not to opt-out, but still want to play it safe, you have the option to place the money in an interest-bearing savings account until you file your 2021 taxes next April. While that won’t affect whether or not you owe taxes, you will benefit from the earnings – and every little bit helps!

Here’s some food for thought:

DO keep the IRS notified of any changes in your family that include the birth of a new child(ren), adoption of a child within the United States, changes to a full custody agreement, or acting as a foster family. The IRS portal to manage payments and updates is live!

***It is important to remember that all dependents will need to have lived with you for more than half of the year, except for newborns and children whose adoption was finalized during 2021.***

DO review your tax withholdings to determine if you may owe next year. When in doubt, contact your tax professional.

When should I spend the money that I receive from this tax credit? If you are in a situation where you need to pay for your housing, electric, food, water, or gas bill, this money is a great way to cover that. Likewise, if you have credit card or other debt that can be paid off using the advance from the Child Tax Credit, that may be a wise use of the funds. Consider how much money you have saved currently and how much you can save by ridding yourself of the monthly payments from your debt.

 When should I save the money that I receive from this tax credit? If you think you may owe taxes next year, and there are no urgent needs to address financially, it is best to save the money you receive from the advance. If you do end up owing taxes, the money is there for you to pull from. If you end up owing more, the IRS offers payment plans that are easy and affordable to complete.

Do you have more questions about the Child Tax Credit payments? Leave a comment below or email me.

Krista Kyte is a personal finance blogger and personal banker with over 18 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.