(Photo by Dave Cyphert of ProPoint Media Photography)
Taxpayers who claim the Earned Income Credit (EIC) and Additional Child Tax Credit (ACTC) received some good news recently. Recent legislation lets you continue to claim these valuable credits–even if your income changed.
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EIC 2020-2021 and ACTC 2020 impacts
With this new “lookback” rule, you can choose to use your 2019 earned income information to determine your eligibility for the Earned Income Credit and the Additional Child Tax Credit if your 2020 or 2021 earned income is lower than your 2019 earned income and doing so results in a larger credit.
For the EIC, you’ll also have the option to use your 2019 earned income for your 2021 return thanks to changes from the American Rescue Plan Act.
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Why the lookback rule is important for those with unemployment or a job change
Without the lookback rule, some taxpayers would qualify for a lower credit than the prior year or potentially even not qualify for these two credits. This could be due to receiving unemployment income or because they had a job change and are earning less.
The key to qualifying for these credits is earned income, so here’s why those life changes matter in the context of the pandemic:
- Unemployment is not considered earned income, although it is taxable and increases your AGI.
- A lower paying job also means that your earned income has been reduced.
The EIC is calculated based on a percentage of your earned income, and other factors impact the credit calculation such as the number of qualifying children you have and your AGI.
For 2020, the ACTC is calculated based on a percentage of your earned income over $2,500, and other factors impact the credit calculation.
For 2021, the ACTC will be fully refundable for some taxpayers, regardless of their earned income.
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Myths and realities about the lookback rule
- Myth: You can use the lookback provision to apply 2019 to your entire return.
- Reality: You can only use the lookback provision for your eligibility for the Earned Income Credit and the Additional Child Tax Credit.
- Myth: You are required to use the lookback provision for the EITC and ACTC.
- Reality: If it’s better for you to use your 2020 income, you don’t have to use the new rule.*
- Myth: It’s always better to use the lookback provision.
- Reality: Check both options to determine if the lookback results in a better outcome; your software or your tax return preparer can help you do the math.
*For your 2021 return, you can choose to use your 2021 income for the EIC if that’s best.
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Additional details about the 2020 lookback rule
Like many things with taxes, there are important nuances to consider. Here are a few other things you should you know about this special lookback rule.
- The lookback rule was created as part of the Consolidated Appropriations Act 2021 passed in Dec. of 2020.
- You can choose to use your 2019 earned income for either the EIC or the ACTC–or both. It’s up to you.
- If you’re married and file jointly, applying the lookback rule means that you both will use your 2019 earned income. It can’t be for just one of you.
- Choosing to use the lookback rule does not impact your 2020 or 2021 Adjusted Gross Income or any other part of your tax return.
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Questions about how the lookback rule affects you?
Look no further than the expertise at H&R Block. You can get answers from our tax pros , who can help with questions about the new rule and both credits, whether you work with us in an office or virtually.
For more information on all of the ways to receive help from H&R Block when filing taxes this season, visit Brookville H&R Block.