Earned Income Tax Credit Changes

A major change in calculating the Earned Income Tax Credit (aka EITC) and the Child Tax Credit was passed as part of the Consolidated Appropriations Act back in December 2020. According to JCT (Joint Committee on Taxation) this provision is estimated to provide roughly $4.1 Billion in additional relief to taxpayers needing it the most.

So this is how it works... If you had a drop in earned income for 2020 as compared to 2019 due to Covid-19 related factors including reduced employment hours, layoffs, etc. , then for this year only you are actually allowed to use your 2019 earned income amount (typically w2 wages) to calculate the amount of Earned Income Credit and Child Tax Credit on your 2020 tax return. This provision can literally make $ thousands in difference in an individual's refund amount for this filing season.

Here's a quick example of this new provision in action...

I had a taxpayer come in to the office yesterday to review a return they had attempted to prepare themselves. The taxpayer is single (not married) with two children under 17 living with taxpayer, and had earned income for 2020 of about $9,000. The taxpayer had calculated the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) accordingly based on the $9,000 in wages. The calculation yielded $3610 in EITC and an additional $975 in CTC. This totals to $4585 between the two credits.

After reviewing the taxpayer's 2019 tax return, we found the taxpayer's 2019 earned income to be roughly $15,000. The taxpayer's income was reduced in 2020 due to a reduction in employment hours, so we used the provisions discussed above. Based on the taxpayer's 2019 wages, the EITC calculation yielded $5,920 and an additional $1875 in CTC. This totals to $7,795 between the two credits.

That's a whopping difference of $3,210 in additional refund. Needless to say, if utilized properly, this new provision will be of great value to taxpayers who have financially suffered due to the Covid-19 pandemic.