Does the New IRS Lookback Rule Apply to Real Estate Activity?
A lot Americans have been hit hard by the impact of the COVID-19 pandemic. It has affected many aspects of life, and in terms of the financial impact, one notable difference is the substantial reduction in income this tax year. The losses may also have had a negative impact on the qualifying tax credits that can be claimed in the current tax year. One credit in particular to take into account is the Earned income tax credit (EITC).
If you’ve received the Income Tax Credit in the past year and your income has been significantly reduced due to the COVID-19 pandemic, you’ll be happy to know that the IRS has implemented a new rule that might work for you. In response to COVID-19, the IRS implemented the new “rollback” rule.
What is the retrospective rule?
The new analysis rule is part of the American rescue plan and was created to help those of us who have been hardest hit. The rule as found in Sec. American Rescue Plan 9626 allows eligible taxpayers to use their 2019 earned income information to determine their eligibility for the Earned income tax credit for the 2020 and 2021 tax years. You can choose to use this method if the income you earned in the current tax year is significantly less than the income you earned in 2019.
If you think you are eligible to use this rule, you must first determine whether the income you earned in the tax year meets the IRS definition: earned income.
What is earned income?
The IRS considers the following sources to be earned income for the purposes of claiming the earned income tax credit:
- Salaries, wages, tips and any other type of taxable remuneration of employees declared to IRS Form W-2.
- Benefits of union strike.
- Disability pension benefits received before minimum retirement age.
- Net earnings from self-employment if:
- You own or operate a business or a farm.
- You are a minister or a member of a religious order.
- You are a statutory employee and have an income.
Please note that rental income is not considered earned income for tax purposes. For tax purposes, income from rent paid falls into the category of investment income. While this category of income is not eligible, other rental activities may be.
Eligible real estate activities
In general, if you participate materially in real estate activities, you are then considered a real estate professional. Real estate professionals are considered self-employed for tax purposes and report their income to the IRS through Schedule C. As such, income from the activity of a professional Real estate is considered earned income and may be taken into consideration for the purposes of the IRS ‘lookback rule.
In addition to the activities of a real estate professional, the IRS may also consider the activities of a Real estate agent as a self-employed person, if certain criteria are met. To be considered independent, the following criteria must be met:
- · Almost all payments for services must be linked to sales and outputs (the number of hours worked is not taken into account).
- Services must be performed under written contact. The contract must state that the services are not provided as employed for federal tax purposes.
If you fall into either of these categories, your income will be considered earned income and you may be eligible for the IRS ‘new lookback rule. If you think you are qualified, consult your tax advisor to take advantage of the benefits of the earned income tax credit.
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The COVID-19 pandemic has permanently changed the world. Many businesses have been closed and many business owners have had no choice but to display their signs closed. While this has become the new normal, if you think you are eligible to use the IRS ‘rollback rule, you should work with your tax advisor to get you through the tough times.