Wednesday, July 24, 2024

Lost a job or income? Don’t lose access to key tax credits

by Associated Press

Americans who lost their job or some of their income in 2020 should pay attention to a new, one-time provision that ensures they don’t lose access to valuable tax credits as well.

The “lookback” rule allows taxpayers to use either their 2019 or 2020 income, whichever is most beneficial, in order to get the most out of the Earned Income Tax Credit and the Child Tax Credit. These are considered the two most valuable tax credits for low- and moderate-income working families.

Together, they lift more working-age people out of poverty than any other government program, said Elaine Maag, a principal research associate at the Tax Policy Center.

Taxpayers qualify and receive credits based on their income and number of dependents. In general, the less you earn, the larger the credit. And they are refundable tax credits, which are particularly beneficial because they can reduce the amount of tax someone owes to zero or potentially yield a refund.

However, some people were potentially facing a smaller credit or no credit because of job loss or reduced income in 2020. That can mean the difference between a refund, which is a financial lifeline in many households, or even owing taxes.

That is because people need some earned income to claim the credits and money from unemployment benefits is not considered earned income in the eyes of the IRS.

So lawmakers, as part of a relief package passed in December, decided taxpayers could “lookback” to their 2019 income to claim these credits.

While it is unclear exactly how many people stand to gain from this new rule, the bulk of the job losses were among lower income workers, who benefit the most from these credits.

The Earned Income Tax Credit is worth $538 to $6,660 depending on income and number of children. People without children can claim the EITC, although its value is much lower. The Child Tax Credit offers up to $2,000 per qualifying dependent child.

“It is certainly true that as the economy is struggling, it is undesirable for a person to be hit with not just an earnings loss but also an EITC or CTC loss,” Maag said. “Efforts to offset this are commendable and will hopefully not end up creating additional complexities for people who already have complex tax returns.”

It is important for taxpayers to be careful when preparing their taxes. The are different calculations for the EITC and the CTC. And the IRS keeps a close watch on those who claim these credits in an effort to avoid fraud.

“Unfortunately…it is a high audit area,” said Arnold van Dyk, director of Tax Service for Tax Audit. “Make sure you can substantiate it even if you do qualify and it is your own children.”

Tax software should walk you through all the steps to determine if you qualify, as should a qualified tax professional. There is also a wealth of information on both credits on the IRS website.

“There is so much at stake for the families impacted,” said Timothy Flacke, co-founder and executive director of Commonwealth, a nonprofit organization that aims to build financial security for vulnerable groups.

Flacke worries some families may be unaware of the lookback provision or have difficulty seeking help with filing as they avoid meeting with people face-to-face. That could lead to fewer or smaller refunds, which Commonwealth said would be “yet another financial shock for low-income families following a year already defined by its unpredictability.”

Families tell Flacke’s organization that they often “hold their breath” until their refund arrives, using it as a way to catch up on bills, pay down debt, boost their savings, or pay for medical procedures or other expenses they have delayed.

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