The big COVID 19 relief bill that just passed December 27th had a lot of big-ticket items in there, mostly for businesses and then the stimulus checks for individuals. One of the overlooked items are some interesting changes to the way some individual tax credits are going to be calculated for the 2020 year.
The earned income tax credit is for low income individuals who are working and have earned income. The key there is that they have earned income. Many self-employed individuals who might have benefitted from the earned income tax credit are going to have a loss in 2020. Their income will be way down, but they’ll lose the benefit of the earned income tax credit. So Congress put an item in the bill that will allow people to use their 2019 earned income for the calculation of the earned income tax credit in 2020. Think of a situation where a family of 4 has $25k of self-employment income in 2019 and then COVID wrecks the business and they lose $25k in 2020. Without this change they would miss out on the earned income tax credit in 2020. The same provision would allow a W-2 wage earner to use their 2019 earned income in calculating the 2020 earned income tax credit.
The same rule will also apply to the refundable portion of child tax credits. The refundable portion of the child tax credit, also known as the additional child tax credit is calculated in part based on your earned income. The ability to look back to 2019 to use the earned income from 2019 for the purposes of calculating the refundable child tax credit should help out individuals who might not have been able to be working during this crazy year.
It’s unclear what new form or changes to existing forms the IRS will come out with to administer this provision, but it should be a big help to folks who need it. For more information, contact any of Our Leadership team.