Families affected by the pandemic recession may soon find that the tax refunds they rely on are dramatically small – or they are subject to income tax. Congress proposed a partial solution, but the amendment was not widely publicized, consumer advocates say.
Necessary repayments are for many low- and middle-income households, who use the money to keep up with bills and medical care, pay off debts and increase savings.
But the unemployment insurance left by many people last year could cause problems during tax year this year. Unemployment benefits are taxable, but withholding tax is voluntary – and many people who have lost their jobs did not know that their unemployment check taxes would be taxable, or they decided not to delay. (Mild checks, like $ 1,200 sent last year, are not taxable.)
Moreover, unemployment benefits are not earned income so do not consider two crucial tax benefits that keep millions of families working with children out of poverty: income tax credit and additional tax credit for children.
“If you’re a single parent or couple with children living, for example, $ 25,000 a year, you may see 25% or more of your annual income in the form of your federal tax refund because of these credits,” says Timothy Plaque. , CEO of the Commonwealth of Independent States, an association that promotes economic security.
There is a correction on credit, but not enough that people know about it
There is no easy solution to tax refunds that are reduced by deducting disabilities. However, Congress has provided a potential amendment to the tax credit issue in the $ 900 billion virus-relief legislation passed last month: portfolios can choose to use their 2019 revenues to determine their credits rather than their 2020 revenues.
But this amendment has not been widely reported, Phillips CEO SaverLife, an organization that encourages working families to save, told me. Not everyone uses up-to-date tax software or intelligent tax preparers, and Phillips fears many eligible people will not learn about it before filing refunds. Rehearsals on February 12th.
“People will start trying to file taxes as soon as they can,” Phillips says. “If you think you have thousands coming in your mail or bank account, you’re there on the first day with your paperwork ready to go.”
Those who rely on refunds tend to apply early
Studies confirm that recipients of early repayments each year tend to have lower incomes, says Fiona Greig, co-president of the JPMorgan Chase Institute, which studies data from millions of customer bank accounts.
“(Tax refund) tends to be a larger cash infusion event for them, and as a result, they tend to request their refund earlier in the tax refund season,” says Greig.
In typical years, tax refunds are worth nearly six weeks for a home for the average recipient, the institute found. Last year the average payback was more than $ 2,500.
Families eligible for income tax credit can receive thousands more. The maximum credit for working families with three or more children is $ 6,660 by 2020, and is refundable, which means that bags receive the money even if they do not owe tax.
The amount you can earn and still win increases with family size, so a married couple with three or more children can receive at least a partial credit with adjusted gross income up to $ 56,844. A single person without children may earn a small credit with adjusted gross income up to $ 15,820. Meanwhile, the regular child tax credit for children under 17 is $ 2,000 and is non-refundable. But low-income families may be eligible for a refund, which can be up to 15% of the income you earned over $ 2,500, up to $ 1,400 per child.
Tax credits have broad support
The credits have been around for decades and have widespread bipartisan support among lawmakers, says Flacke of the Commonwealth.
“This is one of the few areas of particular agreement between the parties that will reward workers at the lower end of the wage spectrum in this tax credit makes sense,” Plaque says.
If you are eligible for one of the tax credits, make sure your tax software or tax preparer reviews your 2019 and 2020 earnings before filing the refund. If you find out too late that you could have received a larger refund, you could file a revised response, but you may face a longer wait. Instead of getting your refund in a few weeks, the repaired replacement may take up to four months.
Subsequently, President Joe Biden proposed a one-year extension of credits as part of the coronary virus relief package. He wants to increase the maximum income tax credit for adults without children from $ 538 to almost $ 1,500 this year and raise the income limit. He also wants to increase the child tax credit to $ 3,000, plus an additional $ 600 for a child under the age of 6, and refund the full amount. If installed, it will be possible to claim these credits in answers submitted in 2022.
This column was provided to the Associated Press by the personal finance website NerdWallet. Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score”. Email: [email protected] Twitter: @lizweston.
NerdWallet: Income Tax Credit (EIC): What It Is and How to Qualify in 2020-2021