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New tax rule could mean bigger tax refunds for some families, but only if they're savvy

Ben Werschkul
·Senior Producer and Writer
·2 min read

In November, a nonprofit group called Commonwealth raised the alarm that a quirk in the tax system meant that many families facing unemployment during the pandemic might have an unpleasant surprise awaiting them come tax season.

They were at risk of losing up to 80% of their tax refund, according to the analysis.

On Dec. 27, then-President Trump signed the massive COVID relief bill into law, which included a work-around: a “lookback rule” that allows filers to use either their 2019 or 2020 income for tax purposes.

The fix should allow many working families to avoid the problem, but only if they’re savvy about how they file this year.

“For tens of millions of Americans, [the moment of a refund] is a really really important part of their financial year,” Timothy Flacke, executive director and co-founder of Commonwealth, said in an interview with Yahoo Finance.

A peculiarity in the tax code around the Earned Income Tax Credit and the Child Tax Credit created the need for a fix.

The earned income tax credit is a refundable tax credit for low- and moderate-income workers. (For 2020, the earned income tax credit ranges from $538 to $6,660, depending on income and number of children.) To qualify for either the EITC or Child Tax Credit, you need earned income. Unemployment benefits are not considered earned income, but they are taxable. So a taxpayer with a big chunk of income from unemployment and little “earned” income could face a sizable tax bill and little in the way of credits to offset it.

Flacke said the fix means 20 million people now “have a much better chance of having a credit at the level we’re used to and refunds typical to what we’re normally expecting this time of year.” (Flacke appeared as part of Yahoo Finance’s ongoing partnership with the Funding our Future campaign, a group of organizations advocating for increased retirement security for Americans.)

Commonwealth, a think tank focused on helping “financially vulnerable people,” is trying to ensure families are aware of this opportunity when filing.

The group has a website devoted to the issue and Flacke hopes that professional tax preparers and professional tax filing software will alert clients to the change. Even if people know about the change, an additional hurdle is that filers need to have their 2019 returns at the ready.

“It can seem like a hassle, a lot of us have had a very disruptive 2020 and rummaging around in boxes to find tax records might not seem worth it,” Flacke said. But “for this year, there could be literally thousands of dollars at stake for some families.”

Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.

Read more:

Why it might be a 'mistake' to file your 2020 taxes now

The 'disappointing' jobs number could be good news for the White House's stimulus push

How the Black unemployment rate will be key for Biden economic team

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