How the collection of unemployment insurance during COVID-19 can impact your tax refund in 2021

Families affected by the recession pandemic will soon find that the tax refunds they are counting on are dramatically lower – or that they really owe income taxes. Congress offered a partial solution, but the solution has not been widely publicized, say consumer advocates.

Repayments are crucial for many low- and moderate-income families, who use the money to pay bills and medical treatment, pay debts and increase savings.

But the unemployment insurance that kept many people afloat last year could cause problems at the time of tax this year. Unemployment benefits are taxable, but tax withholding is generally voluntary – and many people who lost their jobs did not know that their unemployment checks would be taxed or decided not to withhold them. (Relief checks, like the $ 1,200 sent out last year, are not taxable.)

In addition, unemployment benefits are not earned income and therefore do not count towards two crucial tax benefits that keep millions of working families with children out of poverty: the income tax credit for work and the additional credit for child tax.

“Whether you’re a single parent or a couple with children who live on, say, $ 25,000 a year, you can see 25% or more of your annual income in the form of a federal tax refund because of those credits,” says Timothy Flacke, executive director of Commonwealth, a nonprofit organization that promotes financial security.

THERE IS A CORRECTION IN CREDITS, BUT NOT ENOUGH OF PEOPLE KNOW ABOUT IT

There is no easy solution for tax refunds lost due to inappropriate withholdings. But Congress provided a potential solution to the tax credits issue in the $ 900 billion coronavirus relief legislation passed last month: architects may choose to use their 2019 income to determine their credits, rather than their 2020 income. .

But that correction has not been widely publicized, says Leigh Phillips, CEO of SaverLife, a nonprofit organization that encourages working families to save. Not everyone uses up-to-date tax software or well-informed tax preparers, and Phillips worries that many qualified people will not know about this before filling out their statements. The IRS will begin accepting returns on February 12.

“People are going to start trying to file taxes as soon as possible,” says Phillips. “If you think there are thousands of people arriving in the mail or to your bank account, you are there on the first day with your paperwork ready for delivery.”

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THOSE WHO TRUST REFUNDS TEND TO ARCHIVE EARLY

The research confirms that the first recipients of refunds each year tend to have a lower income, says Fiona Greig, co-president of the JPMorgan Chase Institute, which studies data from millions of customer bank accounts.

“(Tax refunds) tends to be a major relative cash-infusion event for them and, as a result, they tend to request a refund at the beginning of the tax refund season,” says Greig.

In normal years, the tax refund amounts to almost six weeks of net payment to the average recipient, the institute concluded. Last year, the average repayment was over $ 2,500.

Families that qualify for the income tax credit from work can receive thousands of others. The maximum credit for families working with three or more children is $ 6,660 for 2020 and is refundable, which means that filers receive the money even if they owe no tax.

The amount you can earn and still qualify increases with the size of the family, so that a couple with three or more children can obtain at least a partial credit with an adjusted gross income of up to $ 56,844. A single childless person can qualify for a small credit with an adjusted gross income of up to $ 15,820. In the meantime, the regular child tax credit for children under 17 is $ 2,000 and is non-refundable. But low-income families can qualify for a refundable credit, which can be up to 15% of income earned above $ 2,500, up to $ 1,400 per child.

TAX CREDITS HAVE GENERAL SUPPORT

The credits have been around for decades and have broad bipartisan support among lawmakers, says Commonwealth’s Flacke.

“It is one of the few areas of consensus among parties that rewarding workers at the lower end of the salary spectrum with these tax credits makes sense,” says Flacke.

If you can qualify for one of the tax credits, make sure that your tax software or tax preparer reviews your 2019 and 2020 earnings before submitting your statement. If you discover too late that you could have received a larger refund, you can file a corrected return, but you may have to wait longer. Instead of receiving your refund in a few weeks, a corrected return can take up to four months to process.

Going forward, President Joe Biden has proposed one-year credit expansions as part of his coronavirus relief package. He wants to increase the maximum income tax credit earned for childless adults from $ 538 to nearly $ 1,500 this year and increase the income limit. He also wants to increase the child tax credit to $ 3,000, plus an additional $ 600 per child under 6, and make the total amount refundable. If enacted, these credits can be claimed in the declarations filed in 2022.

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This column was provided to The Associated Press via the personal finance website NerdWallet. Liz Weston is a columnist for NerdWallet, a certified financial planner and author of “Your Credit Score”. Email: [email protected]. Twitter: @lizweston.

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