January 29, 2021 was Earned Income Tax Credit (EITC) Awareness Day. IRS Commissioner Chuck Rettig stated, "This year marks the 15th annual EITC Awareness Day. For more than 45 years, this tax credit has been helping hard–working Americans and their families. We want to thank our partners around the country who help us reach out to those low- and moderate-income people who may qualify and not even know about it."
The IRS will start accepting 2020 tax returns for processing on February 12, 2021. Taxpayers may use the IRS Free File or other software to file. Current tax filings will be held until processing opens in February. The IRS reminds taxpayers that electronic filing will be the primary way to obtain a rapid refund.
A favorable benefit for taxpayers seeking to claim the EITC is a new lookback rule. The Tax Relief Act of 2020 permits individuals to use their 2019 income rather than their 2020 income to determine their EITC. Because millions of Americans were unemployed during 2020, many individuals had higher 2019 income and will qualify for a larger tax credit.
The Economic Impact Payments (EIPs) are not taxable and are not counted as income. Individuals who qualified for an EIP but did not receive it may claim a Recovery Rebate Credit on their 2020 return.
The EITC is an excellent benefit for low to moderate–income workers. If the credit exceeds the amount of your income tax, the IRS will refund the difference. While millions claim the credit each year, the IRS estimates that up to 20% of those qualified are not claiming the credit.
If you are not certain you qualify, you can use the EITC Assistant tool on IRS.gov/EITC
. This tool is available in English and Spanish. You will need to enter your estimated income and family information to determine eligibility.
Over 25 million taxpayers received $62 billion in EITC payments last year. The average EITC was $2,461 per return. The maximum 2020 EITC for a family with three children is $6,660.
Refunds will be of great interest to individuals who qualify for the EITC. If you claim an EITC or Additional Child Tax Credit (ACTC), the IRS is required to hold refunds until mid-February. The "Where's My Refund?" Tool on IRS.gov
will be updated by February 22, 2021. The IRS anticipates that most of the EITC or ACTC refunds will be distributed during March.
In recent years, a large number of individuals have failed to file for EITC. These may include taxpayers without children, members of the Armed Forces, Native Americans and individuals with non–traditional families, declining incomes or limited English language skills.
The EITC is claimed on your tax return. Even if you are below the normal filing limits, you should use IRS Free File on IRS.gov
to claim your EITC. You may also find help at the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) sites. Finally, a tax professional may also prepare your return and submit your request for EITC.
COVID-19 PPE Educator Deduction
In IR–2021–28 and Rev. Proc. 2021–15; 2021–8 IRB 1
, the IRS announced that educators may deduct out–of–pocket expenses for COVID–19 protective equipment.
Under Section 62(a)(2)(D)(ii), an educator may deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators) of unreimbursed expenses. The expenses typically incurred by educators include books, supplies, computer equipment and other materials used in the classroom. For the period after March 12, 2020, the unreimbursed expenses also include COVID–19 protective equipment.
The deductible equipment may include face masks, disinfectant against COVID-19, hand soap, hand sanitizer, disposable gloves, paint, tape or chalk to guide social distancing, physical barriers such as clear Plexiglas and air purifiers.
Section 62(d)(1)(A) defines an "eligible educator" as any individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. Section 62(d)(1)(B) defines a "school" as any school which provides elementary or secondary education, as determined under state law.
The deduction is above–the–line and will reduce your gross income. The deduction is available even if the educator chooses to take the standard deduction.
Will the April 15 Tax Date Change?
In 2020, the IRS changed the normal April 15 filing date to July 15 due to the COVID–19 pandemic. With the passage of the Consolidated Appropriations bill in late December 2020, the IRS engaged in distributing millions of stimulus payments during the month of January. As a result, the normal January opening of the tax processing season has been delayed to February 12, 2021.
The American Institute of CPAs (AICPA) has approximately 200,000 members. AICPA Vice President of Taxation Edward S. Karl notes there is a highly-compressed filing season. The usual 70 or more days of filing between opening the season and April 15 has been shortened to 62 days. During these 62 days, the IRS will receive approximately 150 million individual returns and process over $250 billion in refunds.
On January 21, IRS Commissioner Chuck Rettig noted that legislation is pending in the House and Senate that may require additional Economic Impact Payments (EIPs). If the Treasury is required to make additional EIPs, it is likely that the April 15 deadline will be deferred.
Rhonda Collins is Director of Government Relations for the National Association of Tax Professionals. She stated, "We will never be able to get everything done by April 15." Her members have mixed feelings because they would like to complete the tax season on time. However, she continued, "Even though they want to keep April 15, it is not realistic."
The IRS delay to February 12 was due to software programming changes necessary to send out the second distribution of EIP's. Jessica Jean is Director of Public Policy at the National Society of Accountants. She noted, "Many who support an extension fear that there are too many challenges and uncertainties, including a lack of guidance, for a shortened tax season to fare well."
A primary challenge for many tax preparers is the employee retention credit (ERC) included in the CARES Act. There is a challenge in coordinating Paycheck Protection Program loan forgiveness and the ERC.
With the second round of EIP's, tax professionals are concerned that the typical taxpayer may be somewhat confused. Stephen Mankowski is a spokesperson for the National Conference of CPA Practitioners. He noted, "I am envisioning this becoming an issue.... with taxpayers not remembering how much was received in either EIP. If the reconciliation isn't on the return, will this get pulled for further processing?"
Tax practitioners are torn between completing the tax year on time and preparing accurate returns. Karl noted the debate has been emotional at some online meetings. He concluded, "It is not a question of whether deadlines are valid or not. Everyone has a valid reason for their position –– wanting to delay or not wanting to delay."
Hopefully, IRS Commissioner Chuck Rettig will make a decision soon on whether or not to extend the April 15 deadline.
Applicable Federal Rate of 0.6% for February -- Rev. Rul. 2021-4; 2021-6 IRB 1 (19 January 2021)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2021. The AFR under Section 7520 for the month of February is 0.6%. The rates for January of 0.6% or December of 0.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.