Now more than ever, the IRS urges people to check and see if they qualify for credits and to claim them when you file. People can use the IRS Interactive Tax Assistant to help determine if they’re eligible to claim certain credits and deductions. Individuals must file a federal income tax return — even if they aren’t otherwise required to file — and specifically claim certain credits.  Check IRS.gov for more information. 

Check eligibility for tax credits

With changes to income and other life events for many in 2020, tax credits and deductions can mean more refunds.

Even if a person owes no tax certain credits may lead to a refund. Some people may find that they’re newly eligible for certain tax credits, such as the Earned Income Tax Credit (EITC) or the Recovery Rebate Credit.

Taxpayers should gather Forms W-2, Wage and Tax Statement, Forms 1099-MISC, Miscellaneous Income, and other income documents to help determine if they’re eligible for deductions or credits. They’ll also need their Notice 1444, Your Economic Impact Payment, to calculate any Recovery Rebate Credit they may be eligible for on their 2020 Federal income tax return.

Note that most income is taxable, including unemployment compensation, refund interest and income from the gig economy and virtual currencies.

Taxpayers with an Individual Taxpayer Identification Number (ITIN) should ensure it hasn’t expired before they file their 2020 federal tax return. If it has, IRS recommends they submit a Form W-7, Application for IRS Individual Taxpayer Identification Number, now to renew their ITIN. Taxpayers who fail to renew an ITIN before filing a tax return next year could face a delayed refund and may be ineligible for certain tax credits.

Taxpayers can use the Tax Withholding Estimator on IRS.gov to help determine the right amount of tax to have withheld from their paychecks. If they need to adjust their withholding for the rest of the year time is running out, they should submit a new Form W-4, Employee’s Withholding Certificate, to their employer as soon as possible.

Taxpayers who received non-wage income like self-employment income, investment income, taxable Social Security benefits and in some instances, pension and annuity income, may have to make estimated tax payments. Payment options can be found at IRS.gov/payments.

Child Tax Credit

Taxpayers with children should file returns soon for advance payments of Child Tax Credit.  The IRS urges individuals and families who haven’t yet filed their 2020 return – or 2019 return – to do so as soon as possible so they can receive any advance payment they’re eligible for.  Filing soon will also ensure that the IRS has their most current banking information, as well as key details about qualifying children. This includes people who don’t normally file a tax return, such as families experiencing homelessness and the rural poor.

For most people, the fastest and easiest way to file a return is by using the Free File system, available only on IRS.gov.

Throughout the summer, the IRS will be adding additional tools and online resources to help with the advance Child Tax Credit. One of these tools will enable families to un enroll from receiving these advance payments and instead receive the full amount of the credit when they file their 2021 return next year.

Additionally, later this year, individuals and families will also be able to go to IRS.gov and use a Child Tax Credit Update Portal to notify IRS of changes in their income, filing status, or number of qualifying children; update their direct deposit information; and make other changes to ensure they are receiving the right amount.

What about the Economic Impact Payments (EIP)?

Taxpayers may be able to claim the Recovery Rebate Credit if they met the eligibility criteria in 2020 and they didn’t receive an Economic Impact Payment this year, or their Economic Impact Payment was less than $1,200 ($2,400 if married filing jointly for 2019 or 2018) plus $500 for each qualifying child.

For additional information about the Economic Impact Payment, taxpayers can visit the Economic Impact Payment Information Center.

Several provisions in the American Rescue Plan Act affect the 2020 tax return and one benefit is for people who have purchased subsidized health coverage through either federal or state Health Insurance Marketplaces.

Unemployment benefits are taxable

Millions of Americans received unemployment compensation in 2020, many of them for the first time. These taxpayers may be unaware that the money received through this program is taxable income.  

This includes that extra $600 per week individuals might have received in 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided for in the Federal Pandemic Unemployment Compensation program.

Individuals are encouraged to use the IRS interactive tool – Are Payments I Receive for Being Unemployed Taxable? – and answer questions about unemployment benefits to help them determine if they’re taxable.

If a person received unemployment compensation in 2020, they should receive Form 1099-G, Certain Government Payments, showing the amount paid in Box 1 and any federal income tax the person elected to have withheld in Box 4. The IRS will receive a copy as well. Some states do not mail Form 1099-G, and individuals will need to get the electronic version from the state’s website.

Individuals who receive a Form 1099-G for unemployment compensation and did not receive unemployment compensation should contact their state tax agency and request a corrected Form 1099-G. States should not issue Forms 1099-Gs to taxpayers they know to be victims of identity theft involving unemployment compensation. Taxpayers who are victims of identity theft involving unemployment compensation should not file an identity theft affidavit with the IRS.

To avoid refund delays, taxpayers should file a complete and accurate return that includes any unemployment compensation received in 2020.

Retroactive changes for 2020

For tax year 2020 only, the first $10,200 of unemployment compensation is not taxable for most households. This tax benefit is only available to those whose modified adjusted gross income is below $150,000 during 2020. The same income cap applies to all filing statuses.

This means that those eligible who haven’t filed a 2020 return yet can subtract the first $10,200 from the total compensation received and only include the difference in their taxable income. For couples where both spouses received unemployment compensation, each spouse can subtract $10,200. Details, including a worksheet, are available at IRS.gov/form1040.

For any eligible taxpayer who has already filed and reported their compensation as fully taxable, the IRS is automatically adjusting their return and providing them this tax benefit. Refunds, based on this adjustment, are being issued in May and continuing through the summer.

Repayment of excess Advance Premium Tax Credit suspended

Taxpayers who, for 2020, purchased health insurance through a federal or state Health Insurance Marketplace and have excess advance payments of the premium tax credit (excess APTC) won’t report an excess APTC repayment when they file their 2020 tax return. Taxpayers use Form 8962 to figure the amount of the premium tax credit (PTC) they are allowed and reconcile it with any advance payments of the premium tax credit (APTC) made for their health insurance through the Marketplace. If the APTC is less than the PTC, they claim a net premium tax credit (net PTC). The process remains unchanged for taxpayers claiming a net PTC for 2020. They must file Form 8962 when they file their 2020 tax return.

However, if a taxpayer’s APTC was more than his or her allowable PTC, the taxpayer has the excess APTC.

The new law suspends the requirement to repay 2020 excess APTC. This means that taxpayers with excess APTC for 2020 do not need to report the excess APTC or file Form 8962. The IRS will automatically reduce the repayment amount to zero. In addition, the agency will automatically reimburse anyone who has already repaid their 2020 excess APTC.

Gig economy work is taxable

The gig economy is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website. Individuals must file a tax return if they have net earnings from self-employment of $400 or more from gig work, even if it’s a side job, part-time or temporary.

What about the Paycheck Protection Program (PPP) for the self-employed?

The PPP enabled small businesses and the self-employed to get a forgivable loan – in other words, a loan that could easily turn into a grant. But it was pretty limited on how much you could get if you were self-employed or a gig worker.

If you are a sole proprietor who files a Schedule C on your federal income tax return – and you qualify for a first or second PPP loan and haven’t applied – you can get a larger amount.

You can calculate your maximum loan amount based on your gross income instead of the bottom line of your Schedule C. (Line 7 of your schedule C instead of Line 31.) This means – in almost every case – you can get more money.

Small-business owners:  Here’s why you need an accountant even if you do your own taxes

Let’s say you are a driver for a ride service, and you “make” $20,000 a year. That’s your gross income. But you deduct all kinds of expenses – your gas, your car, the little bottles of water you have for riders. By the time you deduct all that, the bottom line of your schedule C is $10,000. Before this change, you could only apply for a PPP based on $10,000 – now you’d be able to apply based on $20,000.

What if you’ve already applied for – and received – a PPP loan using only net income? Can you go back and get the higher amount? No. This change isn’t retroactive, though many are lobbying to have it made retroactive.

Taxpayers can use the Interactive Tax Assistant (ITA) to get answers to a number of tax law questions. The ITA can help determine if a type of income is taxable, if someone is eligible to claim certain credits, or if they can deduct expenses on their tax return.

Job loss or change in income in 2020.

A new rule may help you if you experienced job loss or change in income in 2020. To qualify for earned income tax credit, people must have earned income. Generally, earned income includes taxable employee compensation and net earnings from self-employment, as well as certain disability payments.

You can use your 2019 earned income to figure your Earned Income Tax Credit (EITC), if your 2019 earned income was more than your 2020 earned income. The same is true for the additional child tax credit.  Taxpayers with children should file returns soon for advance payments of Child Tax Credit.  For details, see the instructions on form 1040.

Measures Primarily Impacting Individuals for each state

If 2020 returns have already been filed, the stimulus payments will be based on these 2020 returns the IRS has received. Otherwise, the IRS will base the payments on 2019 tax return information.

For federal income tax purposes the stimulus payments are not federally taxable (this is not considered taxable income) and most states will also have considered it not to be taxable income.  (check with your state regulations as to the taxability of your stimulus payment(s).

Affordable Care Act Premium Tax Credit.  

For 2020, taxpayers who received premium tax credits in advance that were more than what they should have received will not have to repay the excess amount or file Form 8962.

In the meantime, the IRS urges taxpayers who have already filed their 2020 returns to avoid filing amended returns, refund claims or contacting the IRS about obtaining newly-enacted tax benefits. Taking any of these actions now will not speed up a future refund and may even slow down an existing refund claim. Instead, the IRS will automatically provide these benefits to eligible filers.

Tax Refund

The best and fastest way for taxpayers to get their tax refund is to regularly checking IRS.gov and to have it direct deposited into their financial account. Taxpayers who don’t have a financial account can visit the Federal Deposit Insurance Corporation (FDIC) website for information to help open an account online.

You can also have an accountant do your taxes.  An accountant is up to date on all provisions of the tax plan and can save you a lot of time and frustration in doing your taxes.

There are a lot of changes taking effect with the American Rescue Plan Act that I couldn’t put them all here. All these changes listed above only affect the 2020 taxes.   

Look for another blog coming soon on the 2021 tax law changes.   

The views and opinions expressed in this column are the author’s.

Disclaimer: The information contained in this communication, including attachments and enclosures, is not intended to be a complete analysis of all related issues. Nor is it sufficient to avoid tax-related penalties. It has been prepared for informational purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication.  The author disclaims all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.