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Some info floating around, and I want to make sure it is for real:

  1.   If someone does not qualify for EIC in 2020, but qualified in 2019, they will be deemed as qualifying for 2020. 
  2.   In fact, if their EIC calculates greater in 2019 than in 2020, they will be entitled to the higher amount on 2020 tax return.
  3.   On a joint return, the "above-the-line" charitable deduction is $600 rather than $300.
  4.   For stimulus payments, all amounts received are calculated using 2020, even if some of the stimulus was not received until 2021.  (For some reason, the automatic stimuli are supposed to be over and done by Jan 15th possibly to accommodate this.

I'm sure there are sources to research, but I even wonder whether they are up-to-date.

 

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1. For EIC purposes, a tax payer may use his 2020 earned income OR his 2019 earned income IF IT IS HIGHER, to calculate his 2020 EIC.

2. See 1.

3. $300 for all filing statuses on 2020 returns, except $150 for MFS. (I don't think the law gives 1/2 to each MFS, so there may be an update on that). 2021 returns get $300 for all filing statuses, except $600 for MFJ. Think of it as $300 per return for 2020 (MFS return splitting a MFJ return in half) and $300 per taxpayer/spouse for 2021.

4. The Recovery Rebate Credit is a 2020 credit. The EIP1 and EIP2 were advances on a 2020 credit. Both EIP1 and EIP2 will be reconciled on the 2020 return. (The law did say the EIP2 is to go out by 15 January 2021.) Tax Payers might receive a positive refundable RRC; but the RRC will not go below zero, so no one has to repay a RRC on their tax return.

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I was in a webinar today (KnoxTaxes/Taxaroo) and another tomorrow (NYSSEA) and four last week and.... Forbes has some good articles and blogs by Tony Nitti. IRS Issue Number IR-2021-10 has last-minute changes to tax laws.

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2 hours ago, Lion EA said:

1. For EIC purposes, a tax payer may use his 2020 earned income OR his 2019 earned income IF IT IS HIGHER, to calculate his 2020 EIC.

 

So, basically most people that collected unemployment for 9 months in 2020 will benefit by using 2019 earned income to calculate EIC (unless they made $14,800 or more on the first three months of 2020).

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Depending on where they are on the bell curve for 2020, if 2019 is higher and gives them more EIC, they can use 2019 instead of 2020. It's a choice to use 2019 if it's higher.

Per IR-2021-10: Also new this year is the option to use prior year income amounts when computing the Earned Income Tax Credit and the Additional Child Tax Credit.

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9 hours ago, Lion EA said:

Depending on where they are on the bell curve for 2020, if 2019 is higher and gives them more EIC, they can use 2019 instead of 2020. It's a choice to use 2019 if it's higher.

Per IR-2021-10: Also new this year is the option to use prior year income amounts when computing the Earned Income Tax Credit and the Additional Child Tax Credit.

I was in a NATP webinar and posed this question: What if the income was LOWER in 2019 but HIGHER in 2020 (phasing them out), would they still be able to use the 2019 to get the EIC? The answer was "Yes." 

I have military clients for whom taxable wages change drastically from year to year, depending on deployments. I once had a pilot making well over 6 digits receive EIC. Most of his wages were in a "combat zone" and not taxable Box 1 wages.

That's why I posed the question. 

Are you saying the answer was wrong? 

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Per the IRS emailed notice, it's wrong for us civilians. I know military has always been able to exclude current year combat pay, or not, whichever benefits them in a tax year. I think I first heard of it in a NYSSEA webinar. I would probably trust NATP more.... You could jump to that section of the CAA (which I'm not doing today -- big biz client) to get it from the horse's mouth.

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Just spotted it in a TaxPractice Pro webinar text. The text said IF the lookback to 2019 is elected, it is for BOTH EITC and the ACTC. And, that you may only elect to use the 2019 earned income if it was MORE than the 2020 earned income. Her CAA cites refer to ALL the topics in that webinar, but she cites Division N page 1924, Division O page 2468, Division EE page 4870, and Division FF page 4990. I'm working on a webinar for music teachers that I'm presenting tomorrow morning via Zoom, so not looking up anything not related to independent music teachers today! But check those CAA Divisions to find your answer.

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On 1/13/2021 at 1:40 PM, Lion EA said:

Just spotted it in a TaxPractice Pro webinar text. The text said IF the lookback to 2019 is elected, it is for BOTH EITC and the ACTC. And, that you may only elect to use the 2019 earned income if it was MORE than the 2020 earned income. Her CAA cites refer to ALL the topics in that webinar, but she cites Division N page 1924, Division O page 2468, Division EE page 4870, and Division FF page 4990. I'm working on a webinar for music teachers that I'm presenting tomorrow morning via Zoom, so not looking up anything not related to independent music teachers today! But check those CAA Divisions to find your answer.

Thanks so much for these details. 

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Took a NYSSEA updates webinar for three hours last night. That speaker (Frank Degen, former NAEA President and former NYSSEA President) also said you can choose to use 2019 earned income for the purpose of calculating both the EITC and the CTC/ACTC -- all or none -- only if the 2019 earned income is higher than 2020. So, I haven't read it myself but have heard it in no less than four webinars from four different speakers I admire.

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I want to make sure I understand...We calculate on the year 2019 or 2020 with the lower income, even though the calculation may give a higher EITC in a different year because of change in children or other qualifiers.  Is this correct?

I did read your response above, but could not come away with a clear-cut yes or no.

This pretty much means that this is NOT a good year to switch tax software.

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If you use the same software, the calculation should be automatic. If you use a different software or have a new client, you should have a place to enter 2019 earned income. By the way, if married couple were not married last year or didn't file MFJ, you enter 2019 earned income so you have their combined 2019 earned income for both of them.

Yes, you would use 2019 earned income if higher for both EITC and CTC/ACTC if, and only if, it gives a lower tax liability due to the combination of EITC/CTC/ACTC resulting in higher credit(s). That's the purpose of the law, knowing 2019 may've been a more typical year and that 2020 might have very little income and correspondingly lower credits. It's to help increase refunds to low-income tax payers.

Work your way through the paper forms to see how it flows. Then practice in your software to know how/where you need to enter to make the results look like you expect. You can be a hero to your clients if you increase their refunds for such a disastrous year.

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This is the way I understand it.

I have a mother who didn't have any children in 2019. On January 31st, 2020 she gave birth to a child and qualifies for Head of household based on my interview. She quit her job on January 14th, 2020 after earning only $1,000 to give birth and to take care for her child. Even though, her job in cleaning has always been available as an essential job, she didn't go back to work in 2020. Since she earns $500 a week, in 2019 she earned $26,000.

She is a new client and will bring copies of her 2019 filing. So will prepare her taxes and I will enter $26,000 as earned income.  I will quickly make a note of how much she will get for EIC and ATC/ACTC.  In this case, I know for fact that someone who earns $1,000 gets a tiny bit of Child tax credit and I also know that someone who earns $26,000 will get the full $2,000 or at least the $1,400 refundable portion. So I will concentrate only on EIC. Going back to the return, as soon as I enter, $26,000 as income for 2020, I will get EIC = $2,514. I will make a note of it and now I will enter the correct information for 2020.  As soon as I enter $1,000 income, EIC credit drops to $349.  Now I know that for this lady, I will be using 2019 income. So, prepare the return and look for the place where I will enter her 2019 income and I will verify that her EIC is $2,514.

Now, Same situation as above, except that this lady earned $15,000 in 2020. Since I do a lot of EIC and using 2019 earned income is optional, I know that I don't need to bother with 2019 income because she is in a "sweet spot" for 2020. But if I am not confident, I will enter $26,000 for 2020 and make a note again that EIC is $2,514. Then I will enter the correct amount of income ($15,000) and EIC credit will jump to $3,584. In this case I will prepare the return just like business as usual without looking for a place to enter 2019 unless it is mandatory.

Now the trick is if this lady earned $5,000 in 2020 and $32,000 in 2019.  If enter $32,000 (2019 income), EIC is $1,555 and if I enter $5,000 (income for 2020) EIC will jump to $1,709. Without looking at the tables, I know that I should use 2019 income in this last example, because in this case the Child tax credit will be $2,000 with $1,400 refundable, which will be more beneficial than the $154 that she will lose in EIC. As you can see this will be tricky unless the software comes to our rescue and requests: "Enter 2019 earned income" and the software will select the best choice for us.

How many of us know by heart what is earned income for EIC? Someone said "4".  Yes, only 4 of us know for fact what earned income for EIC is by heart and I am not one of the four.  So, if I get a new client with only W2s, I will use the suggestions above. But if I get a client with different types of income, I think I will prepare their 2019 return and then roll it over so get extra help from the software. 

If someone can double check my suggestions, I will appreciate.

 

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On 1/14/2021 at 8:54 PM, Lion EA said:

It's only the 2019 earned income that you can use in the 2020 formula for EITC and CTC/ACTC, if 2019 was higher. I think it's in the CAA of 2021

Correct.  Section 211(a) of Division EE. on page 1,885.  The provision allows you to substitute  your 2019 earned income (if higher) in place of your 2020 earned income, although it does not specifically mention EICT or CTC...

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See where your software has a spot to enter 2019 earned income for a new client and if your software generates any comparison document/white paper. I don't use ATX, so don't know how it will appear. But, let your software do as much of the work as possible.

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9 hours ago, DANRVAN said:

meant to say EITC.  How come we are no longer able to edit?

 

Editing is still allowed for 5 minutes after a post is made.  This change was made a couple of years ago after someone here kept going back and changing their posts after I'd responded to them, making it seem like they'd never said what they'd said and making my responses to an issue seem like I was making things up that had actually been said.

If anyone sees something drastically wrong with their own post, everyone still has the ability to hide their own posts in their entirety and are able to post a correct response.   Those hidden posts are still visible to Eric and I but not to the general membership. 

The limits on editing, and allowing hiding but not deleting posts, allows Eric and I to see the actual posts as they occur. 

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