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What to Know About the Advance Child Tax Credit

Are you eligible to receive a child tax credit for 2021? If so, you will see a few positive changes this year. As part of the American Rescue Plan, you’ll notice an increase in the 2021 credit amount for those who qualify. Eligible individuals can also receive half of that credit in advance as monthly payments—with payments beginning as early as July 15th, 2021. 

To keep you up to date, we’ve shared a few basic facts and additional resources that will help you understand the enhanced child tax credit and how it factors into your tax and financial plan for 2021. Here are the basics. 

Who Qualifies for the 2021 Enhanced Child Tax Credit? 

To receive the full 2021 child tax credit amount, your annual adjusted gross income must fall below these thresholds:

These thresholds are to receive the full amount of the child tax credit. If your adjusted gross income is above these amounts, your credit will be reduced by five cents for each dollar above the limit. Congress is currently discussing possible increases to these thresholds so that more Americans can benefit from the enhanced credit. 

2021 Child Tax Credit: The Basics

What Should You Do to Receive This Credit If You Qualify? 

Similar to the recent stimulus checks, there is no action to be taken. This tax credit will be directly deposited into your bank account, or you will receive a check or prepaid debit card, depending on what the IRS has on file. The IRS will be launching a portal to its website prior to July 15th, where you can update any outdated information, such as your filing status or number of children. 

What if You Don’t Want Half of Your Credit in Advance? 

If you would prefer to claim the full amount of your credit on your tax return instead of receiving these advance payments, you will be able to opt-out of the advance credit online once the IRS launches its portal. Please visit the IRS website and review the following additional resources to stay up to date on the child tax credit and any potential changes. 

How to Use the Enhanced Tax Credit to Your Family’s Advantage

If you find that these funds are not needed for your family’s day-to-day life, you can still use this credit to benefit your overall financial plan, and thus your child’s future. Here are a few ideas that our advisors recommend for ways to use this money. 

1. Pay Down High-Interest Debt

Paying down high-interest debt, such as credit cards, is a great way to use your tax credit. By lowering your debt and reducing interest charges, you are more likely to set yourself up for future financial success.

2. Build an Emergency Fund

Use this credit toward an emergency fund for your family. We typically recommend saving three to six months’ worth of living expenses.

3. Start a College Savings Plan

Saving your tax credit to use toward your child’s college education is an excellent way to put these funds to good use. Talk to your financial advisor about setting up a 529 plan or another type of savings that works well with your comprehensive financial strategy.

Additional resources: 

Learn More About How the Advance Child Tax Credit Affects You

Southwestern Investment Group advisors are here to help you understand changes to your tax situation and how those changes affect your long-term goals. Ready to find an advisor near you? Contact Southwestern Investment Group today to schedule a consultation!

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