The American Rescue Plan Act, a huge federal COVID recovery bill passed in March, did more than provide for $1400 stimulus payments. One of its provisions will soon begin impacting millions of American families with children: advance payment of the expanded child tax credit. Those affected should:

• Plan now for best use of extra funds.
• Make a point to pay attention to IRS updates on this topic over the next several weeks.
• Watch their mail – the IRS has begun this week to mail a general information letter to all families it believes to be eligible. In July, they will mail individualized letters specific to each household, telling what to expect.

Expanded Credit. The Child Tax Credit was formerly $2,000 per child; it was unavailable to families with no income, and the amount was limited for families with very low income. For 2021 only:

• Families with children who will still be under age 18 at the end of the year (born after December 31 2003) are eligible for the full amount of the credit, even if they had no or low income.
• The amount of the annual credit is increased to $3,000 for most children, and to $3,600 for children under 6 (born after Dec 31 2015).

NOTE: the expanded credit is available to families with incomes below $75,000 (single); $112,500 (head of household); or $150,000 (married-joint). Families with higher incomes will still receive the $2,000 child tax credit under the previously-existing rules.

Advance Payment. Instead of waiting until tax time next February, eligible families will begin receiving monthly advance payments for part of the Child Tax Credit. This means that beginning about July 15 through December, families will receive monthly payments from the IRS equal to $250 per child. The amount will be $300 for younger children eligible for the $3,600 credit. These advance payments will equate to half of the total tax credit; the remainder will be paid as part of the household’s tax refund next spring.

Consider focusing on family stability. Before making special purchases, families may wish to use the funds to get current and/or stay current on all household expenses (rent, utilities, child care, etc). Building a savings cushion also promotes stability: 1) providing funds in case of unexpected expenses such as car repair or appliance replacement; AND/OR 2) covering upcoming expected costs such as back-to-school, holidays, or property taxes. A savings cushion to cover extra expenses can prevent financial setbacks, promote family stability, and reduce financial stress.

Paying off debt is also a good use of extra funds, especially debts with high interest rates. HOWEVER, it is often wise to build a savings cushion even before all debt is paid off. Without that savings, every unexpected expense simply creates more debt and more stress.

Watch for Updates! The IRS will base payments on information from 2020 tax returns. If your situation changes, you will be able to let them know of changes through one or more on-line portals they will create in the near future (similar to the “Check Your Refund” portal, or the “Get My Payment” portal used for stimulus payments). The portal(s) will allow families to enter information such as: bank information for direct deposit; a new child in your household; updated mailing address. The portal will also allow you to decline the advance payments and choose to receive the entire amount with your tax refund after the year is over.

The IRS reference page for the advance child tax credit is here.