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

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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