Families battered by the pandemic recession may soon discover that the tax refund they are counting on is significantly smaller – or that they actually owe income tax. Congress offered a partial solution, but the solution has not been widely disclosed, consumer advocates say.
Repayments are crucial to many lower- and middle-income households, who use the money to catch up on bills and catch up on medical treatment, pay off debt, and drive savings.
But the unemployment insurance that kept many people afloat last year could cause problems this year during the tax period. Unemployment benefits are taxable, but tax withholding is generally voluntary – and many people who lost their jobs didn’t know their unemployment checks would be taxed, or they decided not to withhold them. (Relief checks, like the $ 1,200 sent last year, are not taxable.)
Furthermore, unemployment benefits are not income and therefore do not count towards two crucial tax benefits that keep millions of working families with children out of poverty: the payroll tax credit and the extra child tax credit
“If you’re a single parent or a couple with kids living on say, $ 25,000 a year, you can see 25% or more of your annual income in the form of your federal tax refund because of these credits,” said Timothy Flacke, executive director of Commonwealth, a non-profit organization promoting financial security.
There is a solution for credits, but not enough people know about it
There is no easy fix for tax refunds that are shriveled by inadequate withholding. But Congress offered a potential solution to the tax credit problem in the $ 900 billion coronavirus bill passed last month: Filers can choose to use their 2019 income to determine their assets rather than their 2020 income.
But that solution isn’t widely known, said Leigh Phillips, chief executive officer of SaverLife, a nonprofit that encourages working families to save. Not everyone uses up-to-date tax software or knowledgeable tax advisers, and Phillips is concerned that many eligible people will not learn about it before filing their returns. The IRS begins accepting returns on Feb. 12.
“People are going to try to file taxes as soon as possible,” Phillips says. “If you think thousands have arrived by mail or to your bank account, you will be there with your paperwork up and running on day one.”
Those who rely on refunds tend to submit early
Research confirms that the first payback recipients per year are typically lower income, said Fiona Greig, co-president of the JPMorgan Chase Institute, which studies data from millions of customer bank accounts.
“(A tax refund) is usually a larger relative cash infusion event for them, and as a result they tend to request their refund earlier in the tax refund season,” says Greig.
In typical years, tax refunds equate to nearly six weeks of net pay for the average recipient, the institute found. Last year, the average payback was over $ 2,500.
Families eligible for the income tax rebate can receive an additional thousands. The maximum credit for working families with three or more kids is $ 6,660 for 2020, and it’s refundable, meaning filers get the money even when they don’t owe taxes.
The amount you can earn and still qualify increases with family size, so a married couple with three or more children can get at least partial credit with adjusted gross income of up to $ 56,844. A single person with no children can qualify for a small credit with adjusted gross income of up to $ 15,820. Meanwhile, the regular child discount for children under 17 is $ 2,000 and is non-refundable. But low-income families may qualify for a refundable credit, which can be as much as 15% of earned income in excess of $ 2,500, up to $ 1,400 per child.
Tax credits have wide support
The credits have been around for decades and have wide bipartisan support among lawmakers, Commonwealth’s Flacke says.
“It is one of the few points of consensus between the parties that it makes sense to reward employees at the lower end of the pay spectrum with these tax cuts,” said Flacke.
If you may qualify for any of the tax credits, make sure your tax software or tax advisor looks at both your 2019 and 2020 income before filing your tax return. If you find out too late that you could have gotten a larger refund, you can get a modified returns, but you may have to wait longer. Instead of receiving your refund in a few weeks, it can take up to four months for an amended return to be processed.
Going forward, President Joe Biden has proposed expanding the credits by one year as part of his coronavirus relief package. He wants to raise the maximum income tax for childless adults from $ 538 to nearly $ 1,500 this year and raise the income limit. He also wants to increase the child discount to $ 3,000, plus an additional $ 600 per child under the age of 6, and make the full amount refundable. If passed, these funds could be claimed on returns filed in 2022.
Liz Weston is a columnist at NerdWallet. She is a Certified Financial Planner and author of five money books, including Your Credit Score. read more
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