3 Reasons this Tax Season is High Stakes for the 90 Million Making Less than $40k
For many of us, this tax season, which kicks off today, February 12th, seems familiar. You gather your W-2s and 1099s. You likely owe taxes or are getting a small refund, so you are in no rush. You’ll get to it when you can.
In contrast, for millions of Americans, this tax season is complex, and they’ll need a guide. It’s the most high stakes tax season they’ve experienced yet. Here are three reasons why.
Reason 1: Filing taxes is the ONLY way to receive stimulus money that families are owed.
Millions of Americans have yet to receive their stimulus checks — some estimating as many as 12 million as of November 2020. Regardless of the reason why people haven’t received it (ranging from never having it issued, to the checks being deposited in the wrong account or mailed to the wrong address), the only way for families to receive their stimulus check money is to file taxes this season and to claim the funds through the Recovery Rebate Credit.
I got a glimpse into this confusion last week. I ran a few posts advertising our free tax resources for new parents, and found my phone ringing nonstop from families in Texas and Tennessee. I received calls from a broad swath of folks — many first time tax filers, some with children, and all with unanswered questions about how to get their checks.
Not only are people unsure how to get their money, but many are also unaware that they are even eligible for it. Again, I’ve seen this in the past few weeks as we’ve had conversations with folks to help them determine whether they are eligible. Some are newly eligible for stimulus funds because of a change in rules or a change in their status.
For example, families who had a child in 2020 are eligible to receive the supplemental dependent stimulus check ($500 from check #1 and $600 from check #2) for that child as long as they were born in 2020. More recently, a change to stimulus check rules means that stimulus check money is now available to families with mixed immigration statuses where one spouse has a Social Security Number (SSN) and the other has an Individual Taxpayer Identification Number (ITIN). In that scenario the SSN holder and their children (with SSNs) are now eligible for both stimulus checks. So, in a household where mom has a SSN, dad has an ITIN, and the two kids have SSNs, that family is now eligible for $4,000 alone in stimulus money — $2,200 from the first check ($1,200 + $500 *2), and $1,800 from the second check ($600*3). But again, they must file taxes to get this money and claim the Recovery Rebate Credit.
Are you confused yet?
Increasing awareness among families about these changes to eligibility is critical because as we’ve shared before, filing taxes is not required for millions who make less than the standard deduction and have W-2 income. For example, a single mother who works a full-time W-2 minimum-wage job earning $7.25 an hour makes $13,920. Her income falls below the head of household standard deduction of $18,650, so she doesn’t technically need to file. But if she doesn’t file, she leaves nearly $5,000 on the table in credits. This leads us to the second reason that this tax season is high stakes.
Reason 2: Families are eligible for billions of dollars in tax credits that are only accessible at tax-time.
The Earned Income Tax Credit (EITC) is America’s most effective anti-poverty program, and is a lump sum refundable credit for low- and moderate-income families. It gets significantly larger once you become a parent. This year it peaks at $3,584 for a parent with one child, both phasing in and phasing out with earned income. The Child Tax Credit (CTC) awards up to $2,000 per a child to offset taxes owed, and only has a portion that is refundable.
Theses two credits are an incredible source of support for low-income families, but there’s a big problem. Every year families leave billions of these credits unclaimed. We’ve estimated that amount for families to be $12B, but know even more is left unclaimed when you consider single tax filers as well. That’s why we at Let’s Get Set have built toolsto help families successfully claim these credits.
Not only are families eligible for these two credits, but there’s an added twist this year! There’s a rule called the lookback provision which allows families to use either their 2019 or 2020 income to calculate their total EITC and CTC credits, and choose the year that gives them a larger credit. In practical terms, this means that families who may have lost a job in 2020 and have lower income from that year can use their 2019 income to get a larger refund. They can use their 2019 income amount to calculate these two credits. This is likely most helpful for families who may have made $10–30k in 2019, but who made less than $10k in 2020 because they were laid off due to COVID. Again, this is great for hardworking families, but they have no idea to look out for it this year. Organizations like commonwealth have issued guidelines to help providers message this change to families who are eligible.
Reason 3: Filing taxes will ensure that families benefit from upcoming legislation and tax policies currently under review, like future direct payments (“stimulus checks”) and the advanceable Child Tax Credit.
Filing taxes means that the IRS will have the most up-to-date information on families, which will make it signficantly easier to get them subsequent rounds of cash assistance.
At the time of this post, there are still multiple proposed plans out there to expand access to two tax credit programs — the Earned Income Tax Credit and the Child Tax Credit. We will devote an entire post to the different proposals for reforming the Child Tax Credit, because there is a lot under consideration there. Of note though, making the credit fully refundable could directly impact 27 million children living in households who don’t qualify for the full $2,000 of the Child Tax Credit as currently structured. That would be a huge step forward for combating child poverty and making our tax code more equitable.
So now you see why there’s so much on the line this season. So what can you do?
We have an incredible opportunity to make sure families know what’s at stake this tax season and are connected to the resources to file for free and to claim their credits successfully. Individuals making less than $66k are eligible for free tax prep, and can find state-by-state information on our website. People can receive both virtual support from IRS-certified volunteer tax preparers or use free versions of popular tax prep software.
If you know of new parents in WA, TX, NV, TN, or WA making less than $66K who could benefit from a tax-time guide, send them our way! We’ll give them that extra layer of support they need to successfully navigate tax-time and get set to kickstart a savings goal. The link between tax-time and savings is powerful.
Join us in helping hardworking families get the most from this tax season.
