If you could predict the future, no one could have thought that the government would be handing out money in advance. The advanced child tax credit is a normal tax credit applied against your federal income tax due and refunded if you overpaid annually. However, for the 2021 tax year, the government is issuing equal monthly payments to taxpayers that will amount to one-half the tax credit typically received on your tax return.
In the news and amongst friends, we hear that this is a positive move or a negative move and most of the time it depends on your politics. Setting politics aside, the reality is you are getting an advance on money you would normally only receive once a year.
Instead of arguing for the pros or cons, I am going to focus on what to do with this money now to boost your net worth.
If you are a finance major or a business owner, waiting for money is never a fruitful strategy. The Time Value of Money means it’s worth more now than it would be later due to its earning power. Dollars in your pocket can be used now.
Here are three ways to invest your money that have tax advantages and will support the long-term prosperity of your family.
As an investor, you have the choice to invest your money in several different ways. It’s hard to find tax-free withdrawals in any investing scenario besides a Roth-IRA. The 529 Plan, named for the IRS code section, is a tax-free investment vehicle as long as you pay for qualified education expenses. Here is the list of expenses that qualify from the FAQ on the IRS website.
For Arizona, “Effective September 29, 2021, for Tax Year 2021 and after, the state of Arizona offers a tax deduction each year for investing in the Arizona 529 Plan of up to $4,000 per beneficiary for married tax filers who file a joint return and up to $2,000 per beneficiary for individual tax filers. There is no limit on the number of beneficiaries Arizona residents can make contributions to in a tax year.” Click here for more information on AZ-based 529 plans.
The Traditional IRA or Roth-IRA are both pretty easy ways to invest and receive either a tax benefit now or later, respectively. Whichever option you choose, know that the limit for 2021 is $6,000 or $7,000 if over age 50.
If you have a company 401k this might be the best option for you. This is another scenario where you can reduce your taxable income and receive interest, dividends or see potential gains just from investing the monies now.
The contribution limit for 2021 is $19,500 and you can add another $6,500 to that if you are over 50.
This is a very simple overview of ways to spend the money that might be burning a hole in your pocket. Taking a few minutes and being intentional will definitely help you make a wise choice. Keep in mind that your refund will be lower at the end of the year but you were smart and that money is earning you more money while decreasing your taxes overall.
If you need help figuring out what you would like to do, contact us here. Not every strategy is the best one for you and consulting a financial advisor and a tax professional may be your next right step.