Credit fix not to miss

Low-income families rely on refunds to catch up

Families battered by the pandemic recession soon may discover that the tax refunds they’re counting on are dramatically smaller — or that they owe income tax. Congress offered a partial solution, but the fix hasn’t been widely publicized, consumer advocates said.

Refunds are crucial to many lowerand moderate-income households, which use the money to catch up on bills and medical treatments, pay down debt and boost savings.

But the unemployment insurance that kept many people afloat last year may cause problems at tax time this year. Unemployment benefits are taxable, but tax withholding is voluntary — and many people who lost jobs either didn’t know their unemployment checks would be taxed, or they decided against withholding. (Relief checks, such as the $1,200 sent out last year, are not taxable.)

Further, unemployment benefits are not earned income and so don’t count toward two crucial tax benefits that keep millions of working families with children out of poverty: the earned income tax credit and the additional child tax credit.

“If you’re a single parent or a couple with kids living on, say, $25,000 a year, you might see 25 percent or more of your annual income in the form of your federal tax refund because of these credits,” said Timothy Flacke, executive director of Commonwealth, a nonprofit that promotes financial security.

There’s a fix on credits, but not enough people know it

There isn’t an easy workaround for tax refunds shriveled by inadequate withholding. But Congress provided a potential fix for the tax credits issue in the $900 billion coronavirus relief legislation passed last month: Filers can choose to use their 2019 income to determine their credits rather than their 2020 income.

But that fix hasn’t been widely reported, said Leigh Phillips, chief executive officer of Saverlife, a nonprofit that encourages working families to save. She worries that many eligible people won’t learn about it before filing their returns. The IRS will begin accepting returns Feb. 12.

“People are going to start trying to file taxes as soon as they possibly can,” Phillips said. “If you think that you’ve got thousands coming in the mail or to your bank account, you’re there day one with your paperwork ready to go.”

Those who rely on refunds tend to file taxes early

Research confirms that the earliest recipients of refunds each year tend to be lower income, said Fiona Greig, co-president of the Jpmorgan Chase Institute, which studies data from millions of customer bank accounts.

In typical years, tax refunds equal almost six weeks’ take-home pay for the average recipient, the institute found. Last year the average refund was more than $2,500.

Families who qualify for the earned income tax credit can receive thousands more. The maximum credit for working families with three or more children is $6,660 for 2020, and it’s refundable.

The amount you can earn and still qualify rises with family size. A single person without children may qualify for a small credit with an adjusted gross income up to $15,820. The regular child tax credit for children under 17 is $2,000 and not refundable. But low-income families may qualify for a refundable credit, which can be up to 15 percent of earned income over $2,500, up to $1,400 per child.

President Joe Biden has proposed one-year expansions of the credits as part of his coronavirus relief package. He wants to increase the maximum earned income tax credit for childless adults from $538 to nearly $1,500 this year and to raise the income limit. He also wants to increase the child tax credit to $3,000, plus an extra $600 per child under age 6, and make the full amount refundable.