I have been hearing about this provision in the recent Covid Relief bill that allows the use of 2019 figures when calculating 2020 tax return pertaining to CTC and EITC.
I located in the bill Section 211. Temporary special rule for determination of earned income which reads:
If the earned income of the taxpayer in 2020 is less then the earned income for the preceding year (2019), the credits allowed under sections 24(d) and 32 of the IRS code may substitute:
1. Such earned income for the preceding year (2019), for
2. Such earned income for the taxable year 2020.
In General the term "earned income" has the meaning given such term under section 32(c) of IRS Code.
Sec 32(c) defines "earned income:" as
(i) wages, salaries, tips and other employee compensation plus
(ii) the amount of the taxpayer's net earnings from self employment for the taxable year (within the meaning of sec 1402(a) Net earnings from self employment. The term "net earnings from self employment" means the gross income derived by an individual from any trade or business carried on by such individual, LESS the deductions allowed by this subtitle which are attributable to such trade or business....
A single parent taxpayer with one dependent child age 8 earned $25,000 in 2019. Files Head of household and received $2568 in earned income credit and $2000 in CTC ($668 CTC and $1332 additional CTC) For a total of $4568 credits.
In March of 2020 the taxpayer loses her job due to covid having only earned $5,000 in wages from Jan-March 2020, she collects unemployment for the remainder of the year in the amount of $20,000.
She reports the $5,000 wages and $20,000 unemployment on her 2020 tax return and her taxable income comes out the same for both 2019 and 2020 however since unemployment isn't considered "earned income" her EITC for 2020 is only $1,709 and her CTC is $1,003 ($628 CTC and $375 Additional CTC) This is $1,856 less in refundable credits for 2020 vs 2019.
Using the "lookback" rule would benefit this taxpayer.
My question is where or how would we enter this information from 2019 into the 2020 software so it calculates the income from 2019 vs 2020 when factoring in these 2 credits?
Also what if the person was "self employed" and earned $15,000 in net self employment income in 2019. They would have received $3023 in EITC and $1,400 in additional CTC for a total refundable credit of $4423, however after paying self employment tax of $2120 only receive a refund of $2303.
In 2020 they only earn $2500 net self employment income for the beginning of the year until March then are out of work and collect $12,500 in PUA unemployment for the remainder of the year.
Without using the lookback rule they would only receive a refund of $438 for 2020, receiving $791 in EITC and paying $353 in SE Tax. Using the lookback rule you would add an additional $2232 in EITC to the $791 to reach the previous years $3023 plus $1400 in additional CTC. So that's an additional $3,632 in refund if you do not calculate 2019's SE TAX which I do not see anywhere in the definition of the section 211 that you would. I have tried looking up explanations of this but have not been successful. Has anyone else?
Well stated and good questions! I don’t think there will be answers for a few more weeks. The IRS and software providers are still scrambling to include the provisions into their software. I imagine that Intuit has devoted a fair share of its development resources to this and are working a fair amount of overtime. It will be a wait and see....
Typically, software changes like this initially include errors and require correction. I’m advising my clientele who may be subject to these provisions that there will likely be a delay in filing this year. I will prepare the returns, but not file until I’m confident the questions and bugs have been resolved.
I’ve always found this forum to be a good way of monitoring the process and progress. I don’t want to be a beta tester and I’d rather wait and do it right than have to explain and file amendments.
1) Tax returns aren't going anywhere any time soon (unless you trust Intuit to stockpile - I don't)
2) EITC returns/refunds won't even be *released* by the IRS until early March.
3) Losing a "customer" with so little patience is probably a good thing.