Editor’s Note: This is part 2 of a 3-part series by Wilmington College Assistant Professor Allen Beatty.
Earned Income Credit and Additional Child Tax Credit
As newsworthy as the stimulus payments were, there are some other often overlooked provisions that didn’t make the news that are equally important. For example, the Earned Income Credit and Additional Child Tax Credit is in the law to help those in need the most.
The Earned Income Credit operates on a bell curve. One must make enough earned income, generally requiring full-time work, to maximize the credit.
Once the taxpayers moves up the income bracket it is phased out. Often these taxpayers worked in the service industries that were harmed the most during the lockdowns. This means that if their earned income was pushed below the height of that curve their credit will be less!
The Consolidated Appropriation Act of 2021 corrected that. If a taxpayer has their 2019 return handy, they can choose to use their income from 2019 to calculate the 2020 credit.
This year of all years when your tax accountant says they need the prior year tax return it could be to your benefit to dig it out for them.
Extra unemployment payments of $600 from the CARES Act and $300 per week later were also part of these relief laws.
A taxpayer needs to keep in mind that unemployment, including these extra payments, are taxable. Watch for a 1099-G from the state of Ohio for these amounts.
Reflecting to an article of mine the News Journal published in 2018, I had mentioned that few taxpayers would be itemizing deductions because of the higher standard deductions with the Tax Cut and Jobs Act.
One of those deductions to itemize was charitable deductions. There has been a concern, although I have not seen figures, that charitable deductions would drop.
Thus, with these new laws a taxpayer for the 2020 return can take as an adjustment (also known as an above the line deduction without itemizing) of $300 for cash, check, or credit card chartable deductions. The amount is $600 for tax year 2021.
Distributions from Qualified Retirement Plans
Generally, when a taxpayer takes a distribution from a qualified retirement plan such as a 401(k), 403(b), 457(b), IRA, SIMPLE IRAs, etc. the taxpayer is subject to an additional 10% tax under Internal Revenue Code 72(t) if under the age of 59 ½ unless some certain very limited circumstances are met.
This year because of the pandemic, there are several exclusions to this penalty if related to COVID-19. The list can be extensive, but basically the two that I could see applying the most is if you or an immediate family member missed work because of a COVID-19 illness or infection, you will probably qualify for this waiver.
Also, if you were in a business or had a business which suffered economically because of the pandemic, you can qualify for this waiver. These are for distributions of up to $100,000 for tax year 2020.
Furthermore, you can choose to spread out the $100,000 equally over tax years 2020, 2021, and 2022. Forms 8915 and 5329 will probably need to be filled as well as paying careful attention to the 1099-R received.
Since retirmenet accounts are considered and “individual item” a married couple can apply this for $100,000 for each of them.
Allen “Al” Beatty, EA, CPA, MT is an Assistant Professor of Accounting at Wilmington College.