Tax Law worth knowing: EITC “Look Back”

If a mention of tax law causes your eyes to roll back in your head, I ask you to snap out of it for a minute, because this one is important to ordinary households. It’s new (and temporary) — part of the new COVID relief bill enacted this past week, and it will be huge for many workers who have been unemployed or had reduced earnings in 2020.

The Earned Income Credit is a powerful tool for helping working families with lower wages. The amount you receive depends on your earned income. Higher earnings (up to a point) means higher EITC.

2019 EITC Chart: Married Couple with 2 children

Here’s a 2019 example: A married couple with 2 children and with earned income between $14,550 and $22,400, was eligible for an earned income tax credit of $5,828 in 2019. That’s an extra $5,828 added to their tax refund. If their income was below $14,550 then their EITC was lower, but even if they only earned a small amount from work, they would receive some EITC. If their income was higher than $22,400 the amount of EITC gradually dropped, but they would still receive some EITC even if their income was as high as $52,400.

Suppose: a married couple with 2 children earned $25,000 in 2019, and received an EITC of $5,785. However, in March of 2020 they were laid off. They did receive unemployment, but that is not earned income. Their actual earnings from work in 2020 was only $5,000, which made them eligible for EITC of $2,010. That’s a loss of over $3,700, in a year when they were already struggling. The “look-back” provision in the new relief bill allows them to receive EITC (and also the Child Tax Credit) based on their 2019 earned income if it would be more beneficial.

By contrast, imagine a married couple with two children who had earned income of $60,000 in 2019. Their income was too high for EITC in 2019. However due to furloughs, their earned income in 2020 was only $40,000. They will be eligible for EITC in 2020 based on their 2020 earnings (assuming they meet other eligibility rules). When calculating EITC and CTC, taxpayers can choose to use either 2019 or 2020 income figures, depending which is better for them.

Tax law worth knowing!

Source: Kitces.com

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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58 thoughts on “Tax Law worth knowing: EITC “Look Back”

  1. Jennifer – it feels strange to have you ask me “are you still of the same opinion…” — as if I was some type of authority figure! It makes me laugh a little and it makes me uneasy – because I am NOT a real authority. That said, I have every reason to believe that the filers you refer to are exactly the types of people this provision is designed to help. Everything I’ve seen supports that the Look-Back provision overrides the normal income rules. Based on a couple of comments I’ve received, it seems likely that some of these returns will be delayed, however, in processing.

  2. I am hearing reports like yours, yes. I guess it’s not surprising, because the IRS computers can’t readily cross-check the information, and of course they also need to be concerned about fraud. I recognize that it’s frustrating, though — the Look-Back is designed to help, but it also creates delay. Pro’s and con’s, I guess! NOTE: I can attest that not “everyone” used the lookback option.

  3. Just curious but since the election to use the look back option for 2019 agi is nothing but a dotted line next to the eic/actc that’s printed as pyei….with the 2019 amount next to it. Since it does not have its own box line on the appropriate tax form wouldn’t they require a manual review and or verification check by an actual person?

  4. I honestly don’t know how they’re handling these, but your comments are on point. Presumably that would be reason for some delay.

  5. I’m reading that this is specific to earned income. We filed our taxes with H&R block, they said we did not qualify for this provision because we had more total income in 2020 than in 2019.

    We had 20897 made in wages in 2019, but 7830 made in wages in 2020. The difference came from unemployment income of 19780 in 2020. But because it grossed more, they would not allow us to claim 2019 EITC/child tax and referred us to EITC worksheet with little explanation. We lost a job in the family last year. Surely this law was made for people like us that would be losing money on taxes this year. It’s so frustrating.

    When I look on their site, it allows me to use lookback and when I ask their tax pros, they say we qualify. Can you tell me where I’m messing up here?

  6. So the deal is this: the amount of EIC is affected by two things 1) your total income, and 2) your earned income. I’m assuming you have children, because your income is too high for EIC if you don’t. That means you’re probably on the upward slope of the “graph” we showed. Therefore, higher earned income will open you up to a possible higher EIC. A lot higher, because there was a big difference between the two years. So the software (or the chart) will identify that you’re better off using last year’s earned income. But THEN step two kicks in, where they look at your total income. Since your total income is higher, that MIGHT reduce the EIC, if you happen to be on the downward slope of higher income folks. But based on the numbers you shared, I doubt you are.
    The potential is determined by your earned income, but the actual figure may be limited by your total income.
    Given that your total income is only a little higher than last year, any reduction for total income would be small, I think.
    The software we use with VITA handles this comparison and application of the rules easily, once we enter the 2019 earned income figure.
    Bottom line: it looks to me like you are completely on track in your thinking.

  7. I did not earn any taxable income in 2020, but earned 11,000 or so in 2019. I filed 0 income and as I was finishing this look back rule applied and used my 2019 figured to calculate my EIC AND child tax credit….
    As I went to file, I got a notice stating I could not efile because I do not have EIC without certain Earned income from currant year present. Am I eligible? Isn’t this the whole purpose of this tax credit?

  8. Kay, I’m sorry I missed your comment coming in – this is a very late response. You’re exactly right – this is the whole purpose of this special look-back provision. I hope you have resolved the issue by now. The tech assistance folks with the software company you are using should be able to help you. Otherwise I have a workaround in mind that could accomplish what you need… you could contact me at bwollan@iastate.edu and we could talk. Hopefully it’s a moot point by now…
    Barb

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