The coronavirus pandemic continues to put a huge strain on household finances. Even in a normal year, a tax refund may be the biggest check you receive all year.
This year, if you qualify for the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC), the Internal Revenue Service (IRS) is allowing you to choose whether to use your 2019 or 2020 income to receive the most credits for which you are eligible. By filing your taxes, you can also make sure you get any stimulus money you may not have received.
We encourage you to file your taxes as soon as you can to take advantage of this money.
Benefits of filing a federal tax return in 2021
Even if you are not required to file federal taxes, doing so this year may be the only way to get back any money that was withheld from your wages (a refund), plus cash in on key benefits and stimulus payments, also known as Economic Impact Payments (EIP).
Benefit 1: Income Tax Refund
If you worked at any time during 2020 or received unemployment, you may have had income taxes taken out of your paycheck, and you might be able to get a tax refund.
Benefit 2: Tax Credits
You may be able to claim the Earned Income Tax Credit or Child Tax Credit when you file your taxes this year. If you are eligible for one of these tax credits, it could reduce the amount of tax you owe and may even earn you a refund.
Because the coronavirus impacted many people’s incomes in 2020, the IRS’s “lookback rule” allows you to choose between your 2019 or 2020 income to determine which will get you the most money back on your EITC or CTC.
Make sure to have your 2019 tax return on hand when you file this year’s taxes so that you have all the information you need.
Earned Income Tax Credit
The EITC or EIC is a benefit for working people with low-to-moderate income. Claiming the credit can reduce the tax you owe and may also give you a larger refund. Use the IRS’s Earned Income Tax Credit Assistant to help you figure out how much you qualify for this year, or ask your tax preparer if you qualify.
Child Tax Credit
The CTC is available if you claim any children younger than 17 (at the end of 2020) as dependents on your taxes. The CTC is worth a maximum of $2,000 per qualifying child. Up to $1,400 is refundable. To get a CTC refund, you must earn more than $2,500.
Benefit 3: Economic Impact Payments
In 2020, the federal government authorized direct payments to Americans called Economic Impact Payments, to help them weather the financial strain from the coronavirus pandemic. Most people who qualified already received these payments.
However, if you don’t normally file taxes and you didn’t receive one or both of the EIPs to help with coronavirus relief in 2020, you may still be eligible.
SECOND ROUND OF FINANCIAL RELIEF THROUGH ECONOMIC IMPACT PAYMENTS
In December 2020, the federal government extended additional financial relief to millions of Americans through a second round of stimulus payments, also called Economic Impact Payments (EIPs). The IRS began issuing payments of $600 a person in December to eligible individuals.
If you did receive an EIP but did not get the right amount, you can also claim the difference when you file. On your 2020 tax return, the EIP is called the Recovery Rebate Credit (RRC). When you do your taxes and fill out a 1040 or a 1040SR form, there will be a place to fill in how much RRC you already received, and then you can calculate whether more money is owed to you.
How to file your federal tax return in 2021
There are several ways to file a tax return, including free tax preparation services for low- to moderate-income individuals, persons with disabilities, the elderly, and limited English speakers. Learn more about affordable ways to file a tax return.
Get help if you need it
You don’t have to be an expert to file your taxes. If you meet certain income requirements, there may be free tax preparation options to help you get your refund and all the credits you’ve earned.
Because of the pandemic, many Volunteer Income Tax Assistance (VITA) programs are offering a variety of tax preparation options in 2021 including virtual tax preparation, drop-off services, and facilitated self-preparation. See if there is a VITA program near you. You can also go to MyFreeTaxes and choose to prepare your own return using free software or to seek free tax preparation assistance.
If you do seek the help of a professional, remember to ask them about choosing your 2019 or 2020 income for the purpose of calculating your EITC and CTC.
Direct deposit your refund
Direct deposit is the safest and fastest way to receive a tax refund. Setting up direct deposit is not just quicker and more secure, it’s also a particularly good solution if you don’t have an address where you can reliably receive mail. If you do not have a bank or credit union account, you can explore account options that are safe, affordable, insured, and can be opened remotely.
The money you get in this year’s tax refund could help cover necessities like food, bills, rent, or mortgage payments. If you do have the ability to save this year, learn more about using your tax refund to start an emergency fund.