The Earned Income Tax Credit (EITC) is a program designed to provide tax relief for American workers with low-paying jobs. Could you qualify for this tax credit? If you have a relatively low income, take some time to find out.
Earned Income Tax Credit Qualification
Some eligible taxpayers miss out on EITC savings because they have no taxes withheld and think that they cannot possibly qualify. However, EITC is a refundable tax credit, meaning that even if you owe no taxes you may be eligible to get money back — as long as you file a tax return. You cannot qualify if you do not file. But if you do file, and owe no taxes, you may get a check from Uncle Sam anyway!
To claim this credit, you must meet certain requirements. First, you must have earned income. Generally, this refers to wages, salaries, tips or self-employment income. Other earned income sources include long-term disability benefits (if you are below the minimum retirement age) and union strike benefits. Unemployment benefits, alimony, child support, interest/dividends, and Social Security benefits do not count as earned income. Non-taxable combat pay may be classified either way — seek professional advice in that situation. You must also have a valid Social Security number and be a U.S. citizen or resident alien, and you cannot be claimed as a qualifying child of another taxpayer.
Next, your Adjusted Gross Income (AGI) must be below a series of scaled limits based on filing status and the number of qualifying children that you have. A qualifying child must be a close relative (child, grandchild, stepchild, or adopted child) and younger than nineteen years of age (or 24 if a full-time student). Foster children and your siblings and their descendants also qualify. Details are available here. Note that only one person can claim the same child. This may cause trouble among separated or divorced parents and can put the IRS in the position to determine who can rightfully claim the credit.
AGIs are found on line 7 of Form 1040. In tax year 2020 (to be filed by May 15, 2021) for single filers, heads of household, or widowers, the AGI limit is $15,820 with no qualifying children, $41,756 with one child, $47,440 with two, and $50,954 with three or more. For married filing jointly status, the corresponding limits are $21,710, $47,646, $53,330, and $56,844, respectively. The corresponding maximum tax credits range from $538 with no qualifying children to $6,660 with three or more qualifying children.
In consideration of how the COVID-19 pandemic affected Americans' incomes in 2020, the IRS is allowing you to use you 2019 earned income to calculate your EITC this tax season if you prefer. If your income was greater in 2019 than in 2020, you may be able to claim a larger EITC. However, check the EITC Table on pages 48-56 of the IRS's Instructions for Form 1040 to make sure which income will give you the greater credit.
You can get a rough idea of whether you qualify for the EITC by using an estimator from the IRS itself. For further information, consult the IRS EITC webpage. Make sure that the information relates to the correct tax year — the IRS is not always diligent in updating the status of their pages to reflect the current tax year and recent changes.
Do not let fear of tax forms stop you from claiming a tax credit that you deserve. Many people who qualify for EITC also qualify for the IRS Free File program or volunteer assistance at IRS centers. Besides, by definition, if you qualify for the EITC, you are very much in need of the financial assistance that it can provide.
The Tax Cuts and Jobs Act of 2017 made no direct changes to the EITC. However, the tax brackets are now adjusted according to the Chained Consumer Price Index (C-CPI) for Urban Consumers, which grows at a slower rate than the previous inflation measure. As a result, the EITC will now also increase more slowly than it would have under the previous tax law.
Get help evaluating your status if you need it, but in any case, be sure to see if you qualify for the EITC. Says Betterment Head of Tax Eric Bronnenkant, "Credits are, in general, more valuable than deductions, because they reduce your taxes dollar for dollar." Collect all the savings that you deserve.
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