The Consolidated Appropriations Act, 2021 makes a temporary change in the calculation of the earned income tax credit and the child tax credit. Taxpayers have the option to calculate these credits for the 2020 tax year using income information for the 2019 tax year.

In general, the calculation of both credits can result in a lower credit amount in a year where there is a reduction in income. The Consolidated Appropriations Act, 2021 allows lower-income taxpayers, who may have seen a reduction in wages in 2020 due to the pandemic, to use 2019 income amounts (if higher) to calculate the amount of the credits for 2020.

Earned Income Credit

Many lower-income individuals with earned income may qualify for the earned income tax credit (EITC). The amount of the credit depends on the taxpayer’s taxable income, earned income, and the number of qualifying children. The EIC may be at least partially refundable. The credit phases out once earned income exceeds a threshold amount based on filing status. Taxpayers must file income tax returns to claim the EIC.

Child Tax Credit

The amount of the child tax credit (CTC) for tax years beginning after 2017 and before 2026 is $2,000 for each qualifying child under the age of 17; and $500 for a dependent who is not a qualifying child, such as a child over the age of 17 or a qualifying relative.

A portion of the credit is refundable. This refundable additional child tax credit (ACTC) is available to taxpayers who do not have enough tax liability to claim the full child tax credit. The calculation of the ACTC depends on the number of the taxpayer’s qualifying children and the taxpayer’s earned income.

The special lookback rule for the EIC and CTC will allow taxpayers the option to use either their 2020 or 2019 earned income to compute the greater tax benefit for the 2020 tax year.

If you have any questions on using this option, please call our office.