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 Donald 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."
What's new for 2020 tax returns?
This tax season, 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.