Tax refunds might be smaller this year than in previous years for many people, the Internal Revenue Service warned, mainly due to a misunderstanding about earned income tax credits. The economic fallout from the ongoing COVID-19 pandemic has considerably increased the number of people receiving unemployment checks.
“Unemployment is not earned income,” said accountant Charity Taber of the firm Taber & Burnett PC in Burnet. “It is taxable, however, and many people don’t realize that or don’t have enough withheld (for income tax) from those unemployment checks.”
Some don’t have anything withheld from their unemployment checks and could owe money when their taxes are filed.
Knowing that taxpayers would have a problem with the earned income credit, Congress included a quick and easy fix in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, approved in December.
“If it’s better for you to calculate your 2020 taxes based on your 2019 earned income tax credit, you can use that figure when calculating your taxes,” Taber said. “Congress has said, ‘We understand you may not have earned as much this year, so you can use that 2019 number in your calculations.”
The earned income credit is for people who earn low to moderate incomes. The tax credit reduces the amount of tax you owe and can even result in a refund. Earned income is income paid for a service or work done by an individual. Income not considered “earned” includes dividends, interest, Social Security payments, or retirement.
The amounts earned or owed vary based on where an individual’s situation falls on an IRS table. For example, a single person with one child who earned up to $41,094 could receive $3,526 in earned income tax credit. If that person was furloughed in 2020 and earned only $15,980 in wages, but made up the difference in unemployment, their tax credit could drop to about $1,000, which cuts drastically into the amount of tax refund that person is expecting.
Because of the stimulus bill fix by Congress, that same single parent can use the income earned in 2019 as an earned income credit, bringing their refund back in line with the previous year’s.
“If you are going to one of the H&R Blocks or someplace that doesn’t have your history, be sure to take your 2019 income tax returns with you,” Taber said. “If you are doing it yourself and are already familiar with earned income tax credit, have your 2019 return with you when you are preparing your 2020 return.”
The IRS is not accepting returns until Feb.12 this year, about two weeks later than usual. However, the April 15 deadline for submitting returns will not change. Last year, because of the pandemic, the tax deadline was extended into January. The IRA announced in January that the deadline would not be moved this year.
Taber answered two other common questions taxpayers have this year.
“No, your stimulus check will not be taxed,” she said.
In 2020, most taxpayers received two stimulus checks: one for $1,200 and one for $600. That income is not taxable.
“If you did not get your stimulus and you are entitled to it, that discrepancy can be reconciled on your 2020 return,” she continued. “It’s a credit on your 2020 return.”
For more information, tax forms, and publications, visit IRS.gov.