New rule helps those who lost jobs in 2020 get tax credits

Many lower-wage workers who are raising families bank on receiving a healthy, four-figure tax refund, likely their biggest single check of the year, when they claim the Earned Income Tax Credit on their income tax returns.

But what happens if you ended up being out of work much of 2020 during the pandemic? Are you suddenly shut out of the earned income credit, which as the name implies requires that you work and earn money? Will you now see hundreds or even thousands of dollars disappear from your tax refund?

Millions of struggling families would have faced just that sort of financial nightmare this spring if not for an 11th-hour action by Congress late in December.

The latest COVID-19 economic relief package, signed by President Trump on Dec. 27, created a special break for obtaining the earned income tax credit after the economic upheaval in 2020.

But the deal isn’t automatic. Tax filers and the people who help them with their taxes now must be aware of the new option and take time to review 2019 earnings, as well as earnings in 2020, to calculate the credit. And they cannot simply assume that they won’t qualify for earned income tax credit.

The payout isn’t immediate. Tax filers who claim the credit face required delays by law even if they file as soon as the tax season starts.

The IRS noted online this year that the EITC refund can be expected “as soon as the first week of March if you file your return online, you choose to get your refund by direct deposit and we found no issues with your return.”

Tax filers will be able to choose whether they want to use either their 2019 or 2020 earned income to calculate the Earned Income Tax Credit on their 2020 income tax returns, thanks to a one-time lookback provision.

The lookback will also help financially challenged people qualify for the refundable portion of the Child Tax Credit, which is allowed even if you do not owe any tax.

You’d pick the year that would generate a bigger tax break.

“This lookback provision may benefit many taxpayers that became unemployed or under-employed during 2020,” said Matt Hetherwick, the director of individual tax Programs for the Accounting Aid Society in Detroit.

“As a result, we recommend that taxpayers be prepared to provide a copy of their 2019 tax return along with all of their current year tax documents to allow for the most accurate 2020 tax return,” Hetherwick said.

Households that faced the most risk of losing money without the lookback provision include those who were unemployed for much of 2020, expected to make up to $25,000 last year and have children at home, according to Boston-based Commonwealth, a nonprofit focused on building financial security.

Many people of color and single women who raise families and work low paying jobs, in particular, risked losing as much as 80% of their tax refunds because unemployment last year would have reduced their tax credits, such as the Earned Income Credit and the refundable Child Tax Credit, according to the Commonwealth’s data.