By Patricia Jones, Task Force on Poverty
We all have to pay taxes to support our government at the federal, state, and local levels. We may not support everything our government does, but for the benefits we receive, we get good value for our tax dollars.
There are ways to reduce our income tax obligations. The government offers both tax deductions and credits. A deduction can be subtracted from your income before your taxes are calculated. A tax credit is worth much more, because it is subtracted from the total tax amount you have to pay. There are several federal deductions and credits available to low-income people.
First, let’s look at income. By now you should have received a Form W-2 from every job you worked in 2020. A Form 1099 shows income from other sources, like contract work or interest on savings. SSA-1099 shows income from Social Security. If you are self-employed, if your net business earnings – that's gross income minus expenses – exceed $400 in the tax year, you must file a tax return and report all your self-employed income.
Form 1099-G shows your income from unemployment compensation. You have to pay income tax on the amount of unemployment you received, including any additional amounts from the CARES Act for COVID layoffs. Go to neworks.nebraska.gov, login on Unemployment Services and find your form if you haven’t received one in the mail.
There are some things you do not need to claim as income: the stimulus check you received, Paycheck Protection Program loans that have been forgiven, or special income like child support or alimony the law or courts say do not need to be claimed.
If your total income is below a certain amount, you don’t owe taxes, so you may not need to file. In 2020, the minimum for single filing status if under age 65 is $12,400. If your income is below that threshold, you do not need to file the federal tax return. However, you may want to file so you can claim certain tax credits.
If you qualify for tax credits, such as the Earned Income Tax Credit or Child Tax Credit, you can receive a refund even if you paid no taxes. To claim the credits, you have to file your 1040 and other tax forms.
The Earned Income Credit (EIC) is a tax refund that puts extra money in the pockets of lower-income working families and individuals, particularly those raising children. Go to irs.gov to find Publication 596: Earned Income Credit (EIC). Complete the EIC worksheet. Then use the EIC table to determine the amount of your credit, which is subtracted from your total tax bill.
There are some requirements. You must be a citizen or resident alien with a social security number, and you have lived in the U.S. for more than half the year. You must be at least age 25 but under age 65. You can’t be the dependent of another person.
Your earned income must be less than $50,954 ($56,844 for married filing jointly) if you have three or more qualifying children, $47,440 ($53,330 for married filing jointly) if you have two qualifying children, $41,756 ($47,646 for married filing jointly) if you have one qualifying child, or $15,820 ($21,710 for married filing jointly) if you don’t have a qualifying child.
Any refund you receive because of the EIC can’t be counted as income when determining whether you are eligible for benefits or assistance like SNAP or TANF.
Next week we will look at the Child Tax Credit.
The Earned Income Tax Credit and Child Tax Credit together boosted the incomes of 28.1 million poor Americans in 2018, lifting 10.6 million above the poverty line and making 17.5 million others less poor. These totals include 11.9 million children, 5.5 million of whom were lifted out of poverty.