Tax Breaks for Lower Income Taxpayers

Tax Breaks for Lower Income Taxpayers

On December 28, 2020, the president signed into law the Consolidated Appropriations Act, 2021 (P.L. 116-220).

Many of you have heard of this since it extends unemployment and provides for another round of ‘stimulus’ payments to be sent out. Much has been written about those provisions.

What is not talked about as much is that it includes tax provisions that affect the 2020 tax filings. Yes folks, they did it again, pass a law at the nth hour that includes the current year. Now the IRS and the tax preparation community (especially the software companies) are scrambling to get the new provisions up and running.

Over the course of the next few weeks, I am going to go over some of these provisions. Understand that this is preliminary, a lot needs to be ironed out. The GPO (government publishing office) has not even published the bill as of this moment. I am relying on a copy I found on LegiScan (Congress.gov is still waiting for the final copy).

I will start with the Earned Income Tax Credit, EITC and the Additional Child Tax Credit, ACTC.
Just a quick word about tax credits. A tax credit reduces tax dollar for dollar. Under certain circumstances a taxpayer can get a credit even if the tax has been reduced to zero. These are two instances in which that can occur.

What is EITC? For certain taxpayers, who work, but have a very low income, the tax law provides them with an opportunity to get a special tax credit, above and beyond any refund they are already getting (if any). This credit is available to taxpayers who have children or to taxpayers with no children who are 25 or older and not yet 65. Either way, the taxpayer needs to have income from wages or self-employment. The credit is available to those whose income is below a certain amount. That amount is based on different situations revolving around the number of children the taxpayer is supporting (from 0 to 3 or more) and to whether the taxpayers are filing a joint tax return or not.
The credit starts at a minimum level, increases as the taxpayer’s income increases, and then decreases once a maximum income level is reached, until it fazes out completely.

In recognition of the fact that many of these low-income families probably had much lower incomes in 2020 (layoffs, furloughs, etc.) and considering that unemployment does not constitute wages, the amount of EITC most of these families will get will drop or completely disappear. The new bill gives these families a break. They can now go back to their 2019 income and use that to calculate their EITC for 2020 if it gives them a better outcome.

What is the ACTC?

The Child Tax Credit (CTC) is a credit of up to $2,000 per qualifying child, $500 for certain other dependents. A portion of that credit, referred to as the ACTC (advanced child tax credit), can be refundable, that is, paid above and beyond their current tax refund. However, lower wages for 2020 can affect the amount that is refundable. Therefore, the same earned income rules that apply for the EITC can also be used to determine the amount of refundable ACTC, that is a taxpayer can use 2019 income for the calculation.

Keep in mind, that by law, the IRS cannot issue refunds to taxpayers who qualify for those credits until they have thoroughly examined the tax returns. In that case, those refunds take up to 2-3 weeks longer to be mailed or direct deposited. Good to get your tax return done as early as possible if you qualify for either or both of those credits and need the money.