BREAKING NEWS: American taxpayers now have 30 more days to file their 2020 tax returns. After facing pressure from Congress to delay the deadline, the IRS announced a new deadline of May 17.

The decision to postpone the filing deadline comes as the IRS falls behind in processing this year’s returns—there is a backlog of more than 7 million returns, according to The Washington Post. An extended filing season will give taxpayers breathing room as they try to figure out all the tax changes resulting from the stimulus bill passed by Congress at the end of December.

For more than 100 million Americans, the Biden administration’s American Rescue Plan Act means a third stimulus payment. This latest round of COVID relief legislation also expands two tax credits designed for working families: The Earned Income Tax Credit and the Child Care Credit.

“These are credits, not deductions,” said Kimberly Palmer, a personal finance expert at NerdWallet. “If you qualify, you can use the credit to reduce the taxes you owe—and maybe increase your refund.”

The temporary provisions in the law—which went into effect last week—will result in “historic reductions of child poverty and provide timely income support for millions of people, including millions of essential workers,” noted a blog post from the Center on Budget and Policy and Priorities.

It does that, the blog post noted, by making the full Child Tax Credit available to all children, except those in families with the highest incomes, and making an expanded Earned Income Tax Credit (EITC) available to more low-paid workers not raising children.

Earned Income Tax Credit

The EITC is a credit of up to $6,600 targeted for Americans who earn less than $57,000 a year. The changes provided by the tax relief law are designed to enable millions of Americans to get a larger credit this year.

Because the EITC is based on earnings, taxpayers who were laid off or had their hours reduced in 2020 would qualify for a larger credit using their 2020 earnings than they would using their 2019 earnings. The law allows those who qualify to decide which year to use for calculating their credit, 2019 or 2020, whichever is most advantageous.

The American Rescue Plan Act fixes what the Center on Budget Policy and Priorities calls “a glaring flaw” in the EITC that “largely excluded most workers not raising children, providing only a tiny credit to a very small number of these workers.”

This year, the maximum EITC for workers without children jumps from roughly $540 to roughly $1,500, among other helpful changes, the center’s blogpost noted.

To qualify for the EITC, you must:

  • Show proof of earned income (pensions and unemployment don’t count).
  • Have investment income less than $3,650 in the tax year you claim the credit.
  • Have a valid Social Security number.
  • Have been a U.S. citizen or a resident alien all year.
  • File your tax return using as: single, married filing jointly, head of household, widow, or widower.

Note: You cannot claim the EITC if you are married but file separately.

There are special qualifying rules for: military members, clergy, or taxpayers and their relatives with disabilities. To find out if you qualify for the EITC, use the IRS Qualification Assistant.

Matthew Frankel, a certified financial planner who writes for the Motley Fool, says the EITC can provide significant financial help for anyone struggling to make ends meet.

“It's a very valuable credit, one of the biggest credits in our tax code, and it can provide thousands of dollars for families who qualify,” Frankel told Checkbook. “A lot of people don't know about it or they assume you can't claim it if you don't have any kids, which isn't the case. A lot of low-income single taxpayers can claim the Earned Income Tax Credit.”

Last year, the average amount received was $2,461, according to the IRS.

More Info: This NerdWallet blog post explains more about the Earned Income Tax Credit. The IRS also has detailed information on its website.

Child Tax Credit

The American Rescue Plan Act temporarily increases the Child Tax Credit for 2021.

For the current 2020 tax season, parents can claim $2,000 for every dependent child up to 16 years old. The child must be related to you, generally live with you for at least six months during the year, and have a Social Security number.

The credit is reduced if your adjusted gross income (AGI) is above $400,000 on a joint return or $200,000 on a single or head-of-household return.

For 2021, the age of eligible children is expanded—17-year-olds now qualify—and the maximum amount of the credit increase goes up to $3,000 per child, $3,600 for children younger than six.

The full credit starts to phase out when your AGI exceeds $75,000 for single filers, $112,500 for head-of-household, and $150,000 for joint filers.

Note: Under the new law, you can now claim the full credit in 2021 even if you were not employed and do not have any earned income.

Because this is a credit, it reduces your tax bill on a dollar-for-dollar basis. For example, if you owe the IRS $5,000 in taxes, but qualified for a $3,000 credit, your tax bill would drop to $2,000.

Congress made the Child Tax Credit fully refundable for 2021, so you get the full amount you’re owed, even if you had little or no income last year, or owed little to no tax, For some, the credit will reduce their tax bill to zero, and the IRS will send them a refund check for the remaining amount.

“For 2020 it was only partially refundable for low-income people. For 2021, the credit is fully refundable,” said Joy Taylor, tax editor at The Kiplinger Tax Letter. “Let's say you report no tax on your return, and you have two young kids, you'll get the full $6,000 credit.”

The American Rescue Plan also requires advance payments of the child credit. Half of the credit will be paid by the IRS to qualifying families in advance of next year’s tax filing season through periodic payments from July to December of this year.

To calculate this pre-payment, the IRS will look at your 2020 return, or the 2019 return if you haven’t filed this year’s return yet.

“When looking at the information on the return, the IRS will assume that everything is static except the age of the child you are claiming,” Taylor said. “If a family's circumstances change in 2021—say they have less income or more income, or they had a baby—Congress anticipated that and told the IRS to develop an online tool so people can make changes as necessary.”

More Info: Kiplinger has a detailed FAQ about the Child Tax Credit. The IRS has a tool to help you determine if a child qualifies for the Child Tax Credit.

Maybe You Can File for Free

You may qualify to do your return for free using the IRS Free File program, a partnership between the IRS and nine major tax software companies to provide free tax-prep software and e-filing to qualifying taxpayers—those with an adjusted gross income (or AGI) of $72,000 or less—filing federal returns. There may be a fee for state returns.

The IRS Free File online look-up tool can help you quickly sort through the nine Free File offers to find the ones that best meet your needs.

It’s best to use the Free File portal on the IRS website to compare Free File options. This is much safer than searching online for something like “file my taxes for free.” Companies taking part in the Free File program must follow these rules:

  • Fees to file your federal return are prohibited: No participant in the Free File program will charge you anything to file your federal tax return. You will not be asked to buy any products or services (for example, promotional rebates) in exchange for having your federal tax return prepared by the Free File program participant.
  • Bank products with fees are not a part of Free File: Companies offering this service cannot offer you bank products that often carry product fees, such as refund anticipation loans.
  • Free File companies guarantee the accuracy of their calculations: You can pursue any accuracy concerns directly with the company that prepared your return.
  • Help is available if you need it: If you need help when you’re doing your taxes on a company’s IRS Free File site, you may refer to the company’s free customer service options.

 




Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.