Congress has passed various economic relief bills to help individuals cope with the COVID-19 outbreak. This tax season will see numerous significant changes as a result of these new regulations. Here’s everything you need to know to maximize your tax refund this year.
Even if you don’t regularly file taxes, some economic relief initiatives may result in a larger tax refund this year. Here are some of the highlights:
- Child Tax Credit: The increased Child Tax Credit is available to nearly every family, including those with no recent income and who do not normally pay taxes. If you received advance payments in 2021, you must file a tax return to obtain the remainder of your credit. If you did not get upfront payments, you are still eligible for the entire credit when you file your taxes.
- Earned Income Tax Credit: This enhanced credit is available to more people than ever before. If you work, this credit may provide money back at tax time or reduce the amount of federal taxes you owe.
- Child and Dependent Care Credit: For the first time, this tax benefit is completely refundable. It helps to offset the costs of childcare or elder care.
- Stimulus checks: If you did not receive the full amount of the three stimulus checks sent by the government in 2020 and 2021, you can get them when you file your taxes.
- Unemployment compensation: Unemployment compensation is taxable and must be recorded.
- ‘Lookback’ rule: If you earned more in 2019 than you did in 2021, the ‘lookback’ rule may help you secure a larger Earned Income Tax Credit refund.
Continue reading to find out more about tax credits, stimulus check stubs, unemployment benefits, the lookback rule, and how they may influence your taxes this year.
Tax Break for Children
The increased Child Tax Credit is worth up to $3,600 for each child under the age of six and $3,000 for each child aged six to seventeen. From July 2021 to December 2021, the government paid half of the Child Tax Credit in advance. You must file a 2021 tax return to get the other half of your Child Tax Credit (which you file in 2022). You may need to refer to IRS Letter 6419 (issued in January 2022), which shows the entire amount of advance payments received.
This information may be useful in determining how much credit you have remaining when you file your taxes in 2022.
If you did not get advance payments, you can still claim the full amount of your Child Tax Credit when you complete your 2021 tax return (which you file in 2022).
Earned Income Tax Credit
Because of the recent expansion, more people will qualify for the Earned Income Tax Credit than ever before. Adults without children are now eligible for a credit of up to $1,500 for the first time. This comprises adults aged 19 to 24 (not students) and over 64 who work and were previously ineligible.
Furthermore, many qualified families with children will receive a little higher EITC. The credit is worth up to $6,728 when you file your taxes in 2022.
Tax Credit for Child and Dependent Care
You can claim the Child and Dependent Care Tax Credit if you paid for childcare so you could work or look for work. This credit can also be claimed if you pay for the care of an adult dependent who is unable to care for himself so that you can work or look for work.
This tax credit can normally be used to reduce the amount of federal taxes owed. The tax credit is more valuable than ever in 2022 and is entirely refundable. This means that if you owe no taxes, you can receive the money as part of your tax refund.
To qualify for the credit, you must know how much you spent on childcare in 2021. You can use bank account statements, receipts, or any other proof that documents your expenses.
The majority of people received their first and second stimulus cheques in 2020 and early 2021, respectively. A third stimulus check was approved and would be distributed during the year 2021. The stimulus payments are not considered income, and you are not required to pay taxes or include them on your tax return.
If you did not receive your first, second, or third stimulus check, or if you did not receive the full amount that you are entitled to, you may claim them as part of your tax return. The IRS calls stimulus payments Economic Impact Payments, or EIPs.
The IRS sent you notifications detailing the amount of the stimulus check:
- The amount of your first stimulus check is shown in IRS Notice 1444. (EIP1)
- The amount of your second stimulus check is shown in IRS Notification 1444-B. (EIP2)
- The amount of your third stimulus check is shown in IRS Notification 1444-C. (EIP3)
To claim the remaining stimulus check stubs on your tax return, you must first determine the total amount you have previously received. (If you did not get any of the checks or cannot recall the amounts, you can still claim your stimulus funds.)
To continue to support economic relief from the COVID-19 pandemic, Congress passed a ‘lookback rule,’ which means that if you earned less in 2021 than you did in 2019, you can calculate your Earned Income Tax Credit (EITC) using either your 2019 or 2021 income—whichever one gives you the most money back.
To take advantage of the lookback, you will need your 2019 tax return. If you make less money in 2021 than you did in 2019, you can choose which income to use. If your earnings in 2021 were higher than in 2019, you must use your 2021 earnings.
If you file your own taxes, learn how to locate your earned income to take advantage of the lookback period.