Susan Tompor: New rule helps those that misplaced jobs in 2020 qualify for key tax credit | Private Finance

Many low-wage workers who raise families rely on a healthy four-digit tax refund, probably their biggest single check of the year, when filing their income tax returns for the earned income tax credit.

But what if you were unemployed a lot during the 2020 pandemic? Are you suddenly excluded from Earned Income Credit, which, as the name suggests, requires you to work and make money? Now are you going to see hundreds or even thousands of dollars disappearing from your tax refund?

Millions of families in difficulty would have experienced exactly this financial nightmare this spring if Congress had not acted on the eleventh hour at the end of December.

The latest COVID-19 bailout package, signed by President Donald Trump on December 27, provided a special hiatus for gaining tax credit following the 2020 economic upheaval.

But the deal is not automatic. Accountants and the people helping them with their taxes now need to be aware of the new option and take the time to review 2019 and 2020 earnings and calculate the credit. And they can’t just assume they won’t qualify for a tax credit.

The payout is not immediate. Taxpayers claiming the credit face must be legally delayed, even if they file an application at the start of the tax season.

The IRS noted online earlier this year that the EITC refund is expected. “Once you submit your return online, choose to deposit directly and we haven’t seen any issues with your return.”

What’s new for the 2020 tax return?

During this tax season, thanks to a one-time lookback determination, tax advisors can decide whether they want to use their earned income for 2019 or 2020 to calculate the tax credit for earned income in their income tax return for 2020.

Looking back also helps financially disadvantaged people qualify for the refundable portion of the child tax credit, which is allowed even if you don’t owe tax.

You would choose the year that would generate a greater tax break.

“This hindsight scheme can benefit many taxpayers who became unemployed or underemployed in 2020,” said Matt Hetherwick, director of individual tax programs for the Accounting Aid Society in Detroit.

“For this reason, we recommend that taxpayers be ready to provide a copy of their 2019 tax return along with all tax documents for the current year in order to get the most accurate 2020 tax return,” said Hetherwick.

Many who qualify for the credits expect to see a sizeable tax refund to cover their bills, pay off their debts, and purchase important larger ticket items for the family.

Detroiters, for example, filed for an average earned income tax credit of $ 3,430 in 2019, including the federal earned income tax credit and the state tax credit.

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“The new lookback provision is vital in these unprecedented times to ensure hardworking families hard hit by the crisis continue to have access to their EITC loans,” said Megan Thibos, director of economic mobility initiatives , on the United Way in southeast Michigan.

“This money helps them become more stable, especially in times like those we are currently experiencing.”

The households that are most at risk of losing money without the retrospective regime include those who have been unemployed for much of 2020 and are expected to make up to $ 25,000 in the past year and have children at home, according to Commonwealth out of Boston, a nonprofit that focuses on funding security.

In particular, many black and single women who raise families and have poorly paid jobs risked losing up to 80% of their tax refunds as unemployment last year would have cut their tax credits such as the Earned Income Credit and the Child Refundable Tax Credit after Commonwealth information.

“Income earned was a necessary ingredient and many of us didn’t have it last year,” said Timothy Flacke, Commonwealth co-founder and chief executive officer.

The tax credits, he said, never expected the rapid and widespread unemployment across the country that happened in 2020 when policymakers shut down much of the economy to curb the spread of COVID-19.

What do you need to do to get the loan?

You must submit a federal return even if no tax is owed and even if there is no obligation to file a federal return.

Every year billions of dollars of earned income refunds nationwide go undetected because many who qualify fail to file tax returns.

If you were unemployed in 2020, you might even think you shouldn’t bother filing a tax return as you would lose credit for earned income anyway.

That would be a huge tax mistake, however, given the important change to ailing households that was included in the $ 900 billion stimulus package passed late last year.

Flacke said it was important for people to know that new tax filing options are available for 2020.

There is a risk that do-it-yourselfers will overlook the change. If they don’t submit, they’d miss out on earned income credit.

And many haven’t heard of the lookback option. Some tax departments at IRS.gov on Jan. 12 didn’t even reflect the new lookback provision but would most likely do so later.

For example, if you received unemployment benefits in 2020, using the earnings credit can help offset other tax liabilities.

The unemployment benefit is a taxable income. Since many had not yet withheld taxes on unemployment benefits, they could face a tax burden. A generous payout of the Earned Earnings Credit could offset some taxes owed and even contribute to a tax refund.

Cari Weston, director of tax practice and ethics at the American Institute of CPAs, said a positive point is that many people who qualify for the EITC also qualify for free tax preparation programs.

For example, in Michigan, qualified tax accountants can reach out to groups like the Accounting Aid Society and the Wayne Metropolitan Community Action Agency for free tax help that can help address the new change. The website of the Internal Revenue Service – IRS. gov – also lists Volunteer Income Tax Assistance and tax advice for the

Tax assistance programs for the elderly.

However, Weston is also concerned that people in a lower-income area often turn to a neighbor who buys tax software and then makes a long list of returns. If that person is unaware of the changes – and doesn’t view 2019 revenue as an option – many people could lose thousands of dollars.

“The software is only as good as the information you put in it,” Weston said.

Flacke also warns that some online EITC or tax refund calculators may not give the correct picture right away, as the special lookback provision wasn’t approved until late December.

How much money are we talking about here?

A complex calculation is required to determine how much money people are receiving. But in general, larger amounts of dollars go to larger families and low-wage workers with permanent jobs.

Think of a bell curve. Someone who is making minimal money builds on a bigger loan by working more hours and making more money, but then peaking and the loan on the other hand goes down and goes away once you make too much money, Weston said .

If you make too much money, you will lose credit. But if you earn too little, you won’t get a lot of credit.

The balance is refundable, which means you can still qualify if you normally don’t have to pay income taxes. Qualified taxpayers can get tax refunds even if they haven’t paid income tax during the year.

The credit for earned income itself varies. The maximum credit is $ 6,660 for those filing a 2020 tax return, but applies only to tax advisors who have three or more qualified children.

In contrast, the maximum loan is $ 538 for someone who has limited income but no children.

In between, the maximum credit is $ 3,584 for employees who qualify for one child and $ 5,920 for employees with two children.

Loan amounts are slightly higher than what is reported on 2019 tax returns when the maximum possible amount for those with three or more children was $ 6,557.

Wages from all types of jobs are qualified, including jobs where federal income taxes are withheld on a W-2 and gig work, such as jobs. B. freelancing or driving a car for supplies that may not be subject to withholding tax.

Income earned does not include things like unemployment benefits, pensions, social security, child benefits, or the pay an inmate receives for work done in prison.

Who Qualifies?

The earnings credit, originally introduced in 1975 as a temporary break, was intended to offset rising wage taxes and other costs for low-wage workers.

The maximum Adjusted Gross Income allowed to earn the Earnings Credit is up to $ 15,820 for a single person with no children.

The highest limit is $ 56,844 for married couples filing a joint return with three or more qualified children.

“Once you reach that number, you will no longer be entitled to this credit at all,” Weston said.

There is a range here too. For example, the cutoff is an adjusted gross income of $ 41,756 for a single person, widowed person, or head of household with a child.

As we know, 2020 essentially turned out to be a disaster area. And Flacke noted that the new tax solution, which takes into account revenue from the year prior to the disaster, is similar to other reliefs offered when a natural disaster such as a hurricane devastates a specific area.

Over the years, some have failed to apply for Earned Income Credit because they failed to realize it applied to them.

Perhaps an employee received a W-2 but didn’t withhold taxes and doesn’t need to file taxes because their income is so low. They lost because they didn’t understand the EITC and how valuable a repayable loan can be.