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The Child Tax Credit was created in 1997 to help alleviate some of the financial burdens parents faced after having children. In 2021, the government paid advance payments of this tax credit to approximately 39 million American households.
Parents can use this extra money at their discretion, from everyday expenses to saving money for the future. Ultimately, it makes sense to use a credit of this sort to help build your child’s future.
What’s the best way to use your credit? If your household is in a stable financial standing, we have some tips for how you can make the best use of this money and some additional information regarding what this tax credit is all about.
What Is a Child Tax Credit?
This government designed this credit to help families succeed and raise their children comfortably. The American Rescue Plan increased this credit from $2,000 for each child to $3,000 for kids over six years old.
In addition, the amount went from $2,000 to $3,600 for children under the age of six. The government raised the age limit to 17 years.
Who Qualifies for a Child Tax Credit?
Working families are eligible for the full amount of their child tax credit to make up to $150,000 per couple. The amount is $112,500 for a single-parent family.
If filing a separate return for each parent, the amount is $75,000. The total amount you receive will be determined by how many children you have.
If you have a higher income, you may be able to get part of the payment up to $3,000. This rule applies to each child between the ages of 6 and 17 by the end of the tax year. Children under the age of six at the end of the year are eligible for up to $3,600.
Children in college who still fall under the set guidelines may also qualify. If your child is over 18, you change over to the $500 other dependent credit.
9 Ways to Use Your Child Tax Credit to Build Up Their Future
If you are planning on receiving this credit or have already done so, there are several ways that you can use the credit to benefit your child and household. Let’s take a look at nine different ways to use your tax credit to build up your child’s future.
1. Child Tutoring
Investing in your child’s education right now can set them up for a lifetime of success. A child can face many educational challenges as they go through elementary school and beyond.
The first few years are the time in their education when they’re learning the basics of math, reading, writing, etc. When they fall behind at this age, it can become a struggle to catch up again later.
In middle school and high school, it’s essential that your child builds a good work ethic and learns as much as possible in anticipation of their adulthood and future. If your child is falling behind, look into hiring a private tutor that can help get them back on track. There may also be some form of review classes in your area that would be beneficial.
2. Extracurricular Activities
Extracurricular activities teach your child a lot of different skills. So, for example, if they’re playing a sport, they’re learning how to participate in that activity.
However, they’re also learning how to work with others as part of a team. They learn what it means to be a good sport, share, and motivate others and themselves.
Investing in a program that interests your child will provide them with an experience that will benefit them for years to come. Just don’t force the activity on them. Instead, let them choose something they want to do, but make sure that their team counts on them.
3. Buy Books
Reading is an important activity that all children should participate in, no matter how old they are. Reading with your child from a very young age helps them develop their vocabulary early. In addition, children who read with their parents at a young age develop better communication skills.
Invest your credit into books that your child can read independently and with you. If your child is older, help them purchase any textbooks and learning materials they need for school.
4. Emergency Fund
You can’t always predict what will happen from day today. While you might be very financially stable right now, there’s the potential that you could lose your job. You could experience an injury on the job that leaves you unable to work.
An emergency fund for your family and household is a safety net that you can fall back on if something happens. It’s nice to have that money set aside. If you don’t need it and your children are older, you can use the money to help them get started with college or a home of their own.
5. 529 Plan
The first education savings plan was created in 1986 by the Michigan Education Trust. They made a prepaid tuition plan that inspired the 529 Plan almost ten years later. This program authorizes tax-free status to qualified tuition programs.
There are currently more than 100 different 529 options available. This investment offers tax benefits when paying for grades kindergarten through 12th grade in addition to college. The great thing about a 529 plan is that it has a low impact on your financial aid eligibility.
6. Build Up Sinking Funds
Many households are unable to save a substantial amount of money each pay period. What little money they have goes into a savings account, but how does that account compare to a sinking fund?
A sinking fund takes a little bit of money and puts it aside each month. You break the money into categories such as a new car, holiday gifts, party expenses, dental care, vacation, clothing, school supplies, etc.
You know exactly how much money you’re putting into these categories and how frequently. Furthermore, the sinking funds give you a better understanding of where your money is going.
7. Roth IRA
A Roth IRA is an excellent option for kids when you want to set aside your tax credit money. This month can grow exponentially with the help of compounded interest.
However, your child must have earned some form of income. For example, this income might be from cleaning your office or painting rental properties over the summer months.
No age restrictions are in place for a Roth IRA for kids. However, the child’s parent will need to be the one to open and manage the account.
8. Contribute to HSA
A health savings account allows you to set aside money on a pre-taxed basis. You can use that money for many purposes, including medical co-pays, prescription medication, eyeglasses, braces, etc.
You can choose how much money you’re putting into your HSA, and some employers will even match contributions. It takes a little bit of management to keep this account going. You’ll need to monitor how much money is there not to exceed the annual maximum contribution.
9. Pay Off Debt
If you have any debt, this can affect your children’s future. When you’re more financially stable, you’ll be able to help your child.
For example, financial stability can allow your child to attend a better private school in the area, or you can pay for their college education so they don’t have to take out a loan that would take them years to pay off well into their adulthood.
There are many different options available to you if you’re looking to take the tax credit your receive for your child and put it somewhere that will benefit your family. It would help if you took some time to investigate your options, so you know what will be the most lucrative opportunity. You can also change your system if you find that it’s not working for you after a certain amount of time.