Common Tax Credits You Should Know About

If you’ve always tried to keep your taxes as simple as possible, then the words “tax credit” probably sound really complicated to you, or maybe something that only the wealthy can use. But don’t just brush off the possibility of claiming tax credits this filing season!

There are many extremely important and useful tax credits designed specifically to help low-income households lower the taxes they pay, erase them altogether, or even get a much larger refund! This new factsheet will describe the basics of some of the most common examples of tax credits, and the ones that the largest number of people qualify for. Getting tax credits requires specifically claiming them on your tax returns – state or federal, depending on which one is offering the credit. The requirements for claiming are different for each credit, and may require you to attach additional information to your return.

However, the savings these credits can give are well worth the extra effort. For example, the Earned Income Tax Credit (EITC)requires you to include documents providing your children’s SSN, other personal information, and financial information showing that you paid for their care for most of the year, and more. But the EITC is one of the largest income tax credits available for low-income families, and can save not just hundreds, but thousands of dollars! These and other tax credits can be lifelines come tax season, and yet too many leave them unclaimed. Make sure to inform yourself on tax credits to make sure you aren’t paying any more taxes than you have to

How to Claim Unreceived Economic Impact Payments or “Stimulus Checks”

The IRS isn’t sending out stimulus checks any more, but if you can show that you were eligible to receive one when they were, but didn’t, there is still a way to get the money – at least before next tax day. The Recovery Rebate Credit is a refundable tax credit that lets you claim any unreceived Economic Impact Payments (EIPs, or “Stimulus Checks”) on your tax return. And if the credit is larger than what you owe in taxes, you get the money added to your refund.

The part that makes this not as easy as it sounds is that you have to claim the tax credit for the year in which the specific check you are claiming was issued: 2020 for the first two, 2021 for the second. You also have to be able to specify exactly how much money you were eligible to receive, or the IRS won’t issue the credits. The size of the stimulus checks were determined by your income and number of dependents – and of course, you needed to have a valid SSN and not be a dependent yourself that year. The IRS Form 1040 Instructions (for 2020 and 2021, respectively) include a worksheet that lets you work out the math yourself. Finally, you should know that taxes for previous years, whether you are filing them for the first time, or amending what you have already filed before, can’t be filed online. You have to mail them in to the IRS.

If you find this too difficult to do yourself, you can use a reputable tax preparer for help, so long as you are careful with how much they charge. Some VITA sites may be able to help as well, but keep in mind that you will want to check with them soon, as the closer tax day is, the busier they get!

What To Know Before Filing Your 1099 Tax Form

Is your boss giving you a 1099 this year, and not a W-2? Anyone who has ever been an employee has probably gotten a W-2 tax form in their life. When you get a W-2, your employer should have already withheld any federal and state income taxes. However, a 1099 form is different. The 1099 form is what employers, or clients, give to independent contractors that they have hired. Independent contractors are workers that, as the name suggests, have some independence from who is paying them.

If you hired someone to do work on your house, that person is probably an independent contractor, not your employee. Gig economy jobs, like rideshare driving, might be considered independent contracting jobs. (Keep in mind that Independent Contractors can hire workers who might be considered employees, so don’t assume you’re an independent contractor because your boss is one.) The IRS considers independent contractors to be self-employed – but they still have to pay income taxes on what they earn, even if they don’t receive a 1099. Unlike with a W-2, if you receive a 1099, or if you don’t receive any form, then the person paying you has NOT taken out the income taxes YOU need to pay.

If you have self-employment income, like that income which is reported on a 1099, then you are expected to make quarterly Estimated Tax Payments at four times during the year. If you don’t, then not only will you have a large tax bill at the end of the year when you file, you will also have interest and penalties to pay for not paying on time. They are called “Estimated” payments because you are the one calculating how much you think you owe. For specific instructions on how to calculate this, and how to pay, read IRS Publication 505 (2023), Tax Withholding and Estimated Tax, available on the IRS Website.

What Is The Earned Income Tax Credit?

Many taxpayers, even ones who file regularly and on time, are missing out on important and valuable tax credits. If you are part of a working family that makes less than $60,000 per year, then there is at least one tax credit you need to know about: The Earned Income Tax Credit (EITC).

The EITC is one of the largest income tax credits out there and is available for millions of Americans – but many don’t take it simply because they don’t know they qualify. For those who meet all the requirements – low income, multiple dependents, a valid SSN – the credit can be nearly $7,000! Even better, if you paid less in taxes than the EITC covers, you will get the difference paid back to you!

The EITC isn’t applied automatically. You have to claim it specifically on your annual income taxes, which means you will need to file, even if you aren’t required to. But if you qualify for the EITC, filing when you aren’t required could actually mean the IRS pays you! Check out MVLS’ new EITC Factsheet, and the IRS website, for more information. Keep in mind that claiming the EITC can slow down the processing of a tax return and delay your refund.

“How to Negotiate a Debt with the IRS” by MVLS LITC Director, John Hardt.

If you are looking for a way to negotiate down a tax debt with the IRS, an Offer In Compromise may be a good option. It works much like you think it would form the name; You propose a certain amount of what you owe as what you can realistically pay, and if the IRS agrees with you, it may reduce what you owe to that amount you proposed. The IRS may consider an Offer in Compromise even if there is no dispute that the taxpayer owes the money.

Keep in mind that the IRS is not required to accept an offer that you submit. The IRS has many rules and requirements for when they will consider an OIC and for what amount they will settle. There are some unscrupulous businesses known as “OIC Mills” which charge people large fees for submitting OIC offers the business knows won’t be accepted, so be wary of claims that seem too good to be true.

To check for yourself whether the IRS would consider an Offer in Compromise in your case, you can check the Offer in Compromise Qualifier tool. While this tool can’t tell you whether the IRS will accept your offer, it can tell you whether it would consider one as applied to your case. The page also gives important information on how Offers in Compromise are submitted and what the offers need to show. If you determine you want to file an offer but need advice, many reputable tax preparers and attorneys offer help with OICs. MVLS may be able to help, if you qualify.

Written by LITC Director, John Hardt.