Understanding the new Advance Child Tax Credit

A new federal response to the COVID-19 pandemic kicks off this month, designed to boost the financial well-being of families with children 17 and under, according to Barb Wollan, finance specialist with Iowa State University Extension and Outreach.

Wollan explains, “For 2021, the Child Tax Credit is changing in two ways: 1) it is being expanded; and 2) half of it will be paid out in advance through monthly payments starting mid-July.” This provides families extra funds they can use throughout the year, rather than getting one larger sum in their tax refund.

Expanded Credit. The CTC was formerly $2,000 per child under age 17; it was unavailable to families with no income, and the amount was limited for families with very low income. “The expanded CTC will provide a valuable boost to many Iowa families,” Wollan reports. The CTC is expanded, for 2021 only, in two ways:

Families with children who will still be under age 18 at the end of the year (born after Dec. 31, 2003) are eligible for the full amount of the credit, even if they had no or low income.

The amount of the credit is increased to $3,000 for most children, and to $3,600 for children under 6 (born after Dec. 31, 2015).

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. 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. For example, a family with three children under 18 will receive $750 (or more if the children are under age 6) each month. 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.

How will the IRS know how much to send each month and where to send it? According to Wollan, the IRS will base the advance payment on the information in a person’s 2020 or 2019 tax return. “That will work fine for most people, but some people will need to notify the IRS of changes,” she says. The IRS has created two online portals where someone can enter information to update their records. These portals are found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021. Wollan strongly encourages families to log in and use the portals if they: 

Did not file a tax return in 2020 or 2019.

Have new direct deposit information (or a new address – but direct deposit is highly recommended).

Need to update the children in your home.

Expect your 2021 income to be too high for the expanded credit. You can opt out of the advance payments and simply receive the appropriate amount when you file your tax return.

For more information about the 2021 Child Tax Credit, go to www.irs.gov or contact your ISU Extension and Outreach county office.