Take care of your bills and debts. Save what you can. Don’t roll the dice.
That’s the advice of financial experts about how households should handle advance child tax credit payments from the federal government that will begin arriving to many families with young kids and teenagers this month and each month for the remainder of the year.
“I wouldn’t take the money and feel like it’s free and something you can experiment with,” said Cathy Lemire, a White River Junction financial coach who helps clients, many of them shouldering burdensome credit card debt and other expenses, in how to manage their budgets. “This is a real opportunity for people to make headway and help break the paycheck-to-paycheck cycle.”
The newly enhanced child tax credit, signed into law earlier this year by President Joe Biden as part of the American Rescue Plan Act, is intended to provide financial aid to households during the pandemic by raising the existing child tax benefit to families up to $3,600 for each child under 6 and up to $3,000 for each child between ages 6 and 17. Half the money is available as a monthly installment this year as an advance on 2021 income taxes, and half will be paid when tax returns are filed next year.
(Taxpayers, if they wish, can opt out of requesting the advance child tax credit payment and elect to receive the money when they file their 2021 federal income tax return next April.)
Although the amounts households will receive vary widely depending upon the number of children, income and filing status, the payments can total thousands of dollars per family and in many cases can exceed the stimulus payments disbursed last year and this year. The Internal Revenue Service estimates that 39 million U.S. households are eligible to receive the advance cash payments, accounting for 90% of families with kids in the country.
Richard Paul, a certified public accountant whose White River Junction practice focuses on families and small businesses, said he has never before seen a government program designed to advance cash payments of the child tax credit, but “the whole goal of President Biden in March was to make sure families got the money now to help them through the pandemic.”
Financial experts emphasize there is no cookie-cutter approach in what any individual household should do with the money as a plan is governed by that household’s particular financial circumstances; a household with minimal debt and a steady income is very different from a house with little or no income and unpaid bills and expenses.
“For a lot of people who might still be playing catch-up on rent or car payments, the first thing I would suggest is (use the money) to prioritize your four walls: housing, transportation, food, utilities,” Lemire said. The next step is to address debt, particularly credit card debt, with its onerous double-digit interest rates.
Paying down debt and cutting the money you hand over to lenders in both principal and interest, Lemire said, “is like giving yourself a pay raise.”
Many families in the Upper Valley who are financially stressed because of the pandemic have no hesitation about how they will use their child tax credit money: It will go to covering the basics.
“The first thing I will use it for is to pay the bills. Take care of necessities, that’s the No. 1 responsibility,” said Jillian Shoulla, a 32-year-old mother of four in Claremont who stopped working the evening shift at McDonald’s when the pandemic began. “I’ve been having to put the AC on because it’s been so hot, and that kicks up the electric bill.”
Shoulla, whose fiance works as a shift lead at Subway, said she may make the judicious splurge as well.
“Maybe buy something I can’t normally afford, like a floatie at Walmart or take the kids to Wade’s and say, ‘Get the biggest ice cream you want,’ ” Shoulla said, referring to Wade’s Place, a popular ice cream and frozen yogurt stand on the Sugar River in Claremont. “People are going to take it and go on vacation, but that’s not what it should be used for.”
Paul, the accountant, recommends the tax credit as an opportunity to “establish an emergency fund” to tap in the event of unforeseen expenses or an interruption in income. Inadequate savings is a major problem among American families, although Paul recognizes the obstacles many households face in trying to set aside even a bare minimum.
“Most pros want three to six months of living expenses in savings” but “in reality” two months of living expenses in savings would be a more realistic — and achievable — goal, “especially in the Upper Valley where rent’s so high.”
Jessica and Daniel Rothbart, of Newport, N.H., said the tax credit will make a huge difference for their family this year and next. The Rothbarts have six children, ages 5 to 14, and Daniel estimates that they’ll be receiving “in the ballpark” of $1,000 per month through the end of the year.
Rothbart said the money will mean his wife will not have to return to work as a substitute teacher and can instead stay at home to home-school the three of their children who have requested it. (The Rothbarts said they allow their kids the option each year of whether they want to go to the local school or be home-schooled.)
“Now we can focus on the kids without having to worry as much about money,” said Rothbart, who said he earns about $40,000 a year in the IT department of Newport firearms manufacturer Sturm, Ruger & Co.
And don’t wait for the checks from the government to come rolling in before deciding how to use the advance payment, advises Lebanon financial coach Katy Almstrom.
“Know exactly what the plan is before the money comes in,” said Almstrom, adding that the “temporary bump” the payments represent should be viewed as a one-time event like a bonus or gift. “For every family that will be different, but map it out ahead of time.”
Almstrom said the money would be wisely deployed to “start with a little more savings or to knock down those piddly debts that are creating anxiety.”
“Especially in the UV with housing and winter coming — put it in savings,” Almstrom said. “There are always big expenses coming around the corner that are not on our radar because they are not frequent: snow tires, car repairs, propane, taking the dog to the vet — things that make us turn around and use the credit card and cause stress.”
One thing nearly all financial experts agree on is that, unless a family’s finances are solid and in the enviable position of not facing a pressing need, the child tax credit payments should not be funneled into risky investments.
With online platforms trading fractional shares, it’s easier than ever to buy trendy stocks like GameStop and AMC Theaters or cryptocurrency like bitcoin or Dogecoin. but that doesn’t mean it’s a good idea.
Given bitcoin’s volatility, it’s not a good way to strike it rich, according to financial planner Tim Fisher, founder of Fisher Financial Advisors in Hanover.
“You might as well go to a convenience store and buy a Megabucks ticket,” Fisher said.
Fisher sees using the tax credit for expenses other than what is necessary an abuse of the program’s intended purpose.
“The bigger picture is some families are going to need the (child tax credit) to pay for rent because they are past due or to pay for food because they are food-insecure,” he said.
Indeed, Daniel Rothbart said he views the tax credits as simply equitable treatment for families often overlooked in economic policy, and he makes no apology for accepting the money.
“Anything that gives money to lower-income families is A-OK in my book,” Rothbart said. “If the wealthy can get their tax cuts or large corporations get their bailouts, then the American people should be able to get their bailout for their personal lives if they need it.”
Contact John Lippman at jlippman@vnews.com.
