Personal Finance Coach: EITC Awareness Day & the New “Lookback” Provision
Today is EITC Awareness Day! Millions of workers qualify for EITC for the first time this year, so check your eligibility at www.IRS.gov/eitc!
The Earned Income Tax Credit is a refundable tax credit designed to support low- to moderate-income families. It helped 5.6 million people out of poverty in 2018 including three million children. 25 million eligible filers received about $62 billion in EITC nationwide as of December 2020, averaging $2,461 each.
2020 income eligibility tops out at $56,844 for households with three or more children with EITC refunds from $2 to $6,600 depending on marital status and children.
2020’s toxic mix of less earned income, more taxable unemployment insurance benefits, and reduced student loan interest deductions due to the federal moratorium threatens to leave millions of filers with a much lower EITC this tax season.
Recognizing this state of affairs, Congress included in the December COVID relief package a lookback provision enabling filers who earned less in 2020 compared to 2019 to choose 2020 or 2019 earned income when determining EITC eligibility, whichever yields the biggest return. The lookback provision strengthens EITC’s ability to support low-income families who in 2020 suffered lost jobs and reduced income because of the pandemic.
TrustPlus spoke with TrustPlus associate director of programs Jonathan Lee about EITC and what his clients should be thinking about as they look to file 2020 taxes by April 15, 2021. Answers edited for length and clarity.
What should clients understand about filing the EITC this year?
If you are already planning on using your refund for a specific purpose, then manage your expectations because 2020 refunds will look different.
And in a potential scenario, you might actually owe, where in previous years you received a refund. To help manage your expectations, you can visit the IRS’s tax withholding estimator.
Why is the 2019 EITC lookback provision necessary?
During the COVID-19 pandemic, we had clients who did not earn as much income to claim an earned income tax credit, clients received unemployment insurance on which they either had no taxes withheld or not enough taxes withheld, and then payments on student loans were at zero with zero percent interest. And so the deduction for student loan interest will be much lower.
What should EITC filers do?
They can definitely be aware of the issue and to take that a step further, they can go on the IRS’s website to search for the IRS tax withholding estimator and put in their information for the 2020 tax year. And then the IRS, that tool will give you an estimate of how much you will owe/how much you will receive.
What do you do as a personal finance coach when you’re not helping clients with EITC?
We can help our clients repair their credit or establish their credit. We can help them manage their debts by coming up with more effective debt management strategies, budgeting, helping with savings and helping to build savings.