How do I elect to use the prior-year earned income amount to compute EIC and/or CTC for tax year 2020?
Due to COVID-19, some taxpayers may have experienced a change in earnings for tax year 2020. This can impact the calculations of both the Earned Income Credit (EIC) and the Child Tax Credit (CTC). Section 211 of the Consolidated Appropriations Act, 2021 bill allows for a temporary special rule for determination of earned income as follows:
"IN GENERAL.—If the earned income of the taxpayer for the taxpayer’s first taxable year beginning in 2020 is less than the earned income of the taxpayer for the preceding taxable year, the credits allowed under sections 24(d) and 32 of the Internal Revenue Code of 1986 may, at the election of the taxpayer, be determined by substituting—
- such earned income for the preceding taxable year, for
- such earned income for the taxpayer’s first taxable year beginning in 2020."
In Drake20, an entry field is available on the 8812 screen for the Prior-year earned income (PYEI). To give taxpayers the largest credit possible, Drake Tax 2020 will calculate both credits, using both prior-year and current-year earned income, and automatically determine which results in the larger credit. Important: Prior-year earned income (PYEI) can only be substituted for current-year earned income (CYEI) if the PYEI is larger than CYEI (see note 578).
Note: In prior years, in the case of a natural disaster, the EIC and CTC could be calculated using either the prior-year earned income or the current-year earned income, but the same income had to be used to calculate both credits. For 2020 tax returns, all taxpayers – not just those in declared disaster areas – can take advantage of calculating these credits using prior-year earned income. In addition, either credit can be calculated using either prior-year income or the current-year income, whichever is most beneficial to the taxpayer.
An amount will be updated from Drake19 if both of the following apply:
- An amount for EIC or ACTC was present on the 2019 return.
- The 2019 was e-filed through Drake19.
Note: If the return was prepared outside of Drake Tax, on a different computer, or was paper-filed, a direct entry must be made on the 8812 screen, if applicable.
When the use of PYEI is more advantageous, it will be used to calculate the EIC and/or CTC. The following designations will also be shown in view mode:
- Form 1040, line 27 displays the calculated EIC with a literal PYEI and the dollar amount to the right.
- Form 8812, line 6a will display the amount from screen 8812 for Prior-year earned income.
- Wks EIC displays the same amount on line 5 with the literal Prior Year Earned Income printed to the left of the line.
Important: The EIC calculation is still subject to AGI limitations when either the PYEI or CYEI are being used to calculate the available credit. The AGI that is used is always the current year AGI, per IRS guidelines. Certain income items, such as unemployment, are not considered earned income, but are still included in the AGI and can affect the calculation.
The following notes may be generated in view mode. You may need to review the calculations, and verify (or directly enter) the prior year earned income amount on screen 8812. To use only the current year earned income amount in the calculations, remove the amount from the 8812 screen entry field.
CURRENT-YEAR INCOME PRODUCED MORE EIC: Calculations using the current-year earned income produced more EIC for the taxpayer than did the prior-year earned income entered on screen 8812. The program will therefore use the current-year earned income for EIC calculations for this return.
PRIOR-YEAR EARNED INCOME (PYEI) IGNORED: There is an amount in the "Prior-year earned income" field on screen 8812, but the amount is less than the current-year earned income (CYEI).
Because PYEI can be substituted for CYEI only if PYEI is larger than CYEI, the program has ignored PYEI and used the current-year earned income for EIC and CTC calculations.
USING PRIOR-YEAR EARNED INCOME (PYEI) TO COMPUTE EIC AND CTC: For 2020 tax returns, if the taxpayer's 2020 earned income is less than the taxpayer's 2019 earned income, both the Earned Income Credit (EIC) and the Child Tax Credit (CTC) can be computed using the 2019 earned income. If the 2019 return was calculated in Drake Tax, the "earned income" amount can be found on line 5 of worksheet "Wks EIC." If worksheet "Wks EIC" was not produced because the taxpayer did not claim EIC in 2019, but Advanced Child Tax Credit (ACTC) was claimed, the PYEI can be found on line 6a of Form 8812.
If neither the EIC nor the ACTC was claimed on the 2019 return, see Internal Revenue Code Section 32(c) to calculate the 2019 earned income.
PRIOR-YEAR EARNED INCOME USED: The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, allows taxpayers to substitute their prior-year earned income (PYEI) for their current-year earned income (CYEI) when computing both the Earned Income Credit (EIC) and the Child Tax Credit (CTC) if the PYEI is more than the CYEI. Because the PYEI entered at the bottom of screen 8812 is more than the CYEI, and because using it results in higher EIC or CTC, the program automatically made the substitution.
For more information about earned income, EIC, and CTC, see Related Links below.