The Earned Income Tax Credit (EITC) was designed by the federal government in 1975 to alleviate financial burden on low-income taxpayers. The EITC was promulgated as a temporary statutory provision, but the credit is still available in the status quo.
Given the different types of tax credits that are available to the American people, it can be hard to ascertain which of those credits they qualify for and why. It is very useful to be aware of what tax credits one can claim, as they provide substantial savings on a filer’s overall tax contribution and can even lead to an increased tax refund. The Earned Income Tax Credit (EITC) is one of the most valuable and refundable tax credits for low or moderate income families.
In addition to this, you must remember that this is a refundable tax credit. This means that the IRS will send you a tax refund, an amount that is left over after any tax that is owed to the IRS is deducted. The amount of credit differs depending on one’s income and how many dependents one has.
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020. It was signed in order to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use either their 2020 or 2019 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC)
If you want to know more about what is earned income credit, then you have come to the right place. We have gathered all relevant information to help you understand everything that you need to know. So, what are you waiting for? Without much further ado, let us dive right in and have a look at what earned income credits are and how do they work?
Table of Contents
- 1 What is the earned income credit?
- 2 Understanding the earned income credit
- 3 How do tax credits work?
- 4 How does earned income credit work?
- 5 Earned income credit qualifications
- 6 How to claim your earned income credit?
- 7 Kids and the earned income tax credit
- 8 Pros and cons of the earned income tax credit
- 9 Consequences of an EIC-related error
- 10 Some facts about EITC
- 11 Conclusion
What is the earned income credit?
The procured pay credit (EIC) is a tax reduction that helps certain U.S. citizens with low procured earnings to report for the duty year. The EIC decreases the measure of duty owed on a dollar-for-dollar premise and may bring about a discount to the citizen if the measure of the credit is more noteworthy than the measure of expense owed.
The earned income tax credit finances low-pay working families. The credit approaches a fixed level and percentage of income from the first dollar of profit until the credit arrives at its greatest. The most extreme credit is paid until profit arrives at a predetermined level, after which it decays with each extra dollar of pay until no credit is accessible.
The most extreme Earned Income Tax Credit sums for the 2020 duty year—the return you’d record in 2021—are as per the following:
- $6,660 in the event that you have at least three qualifying youngsters
- $5,920 on the off chance that you have two kids
- $3,584 in the event that you have one youngster
- $538 in the event that you have no youngsters
These credit sums increment yearly to stay up with inflation. The greatest credit in the 2021 tax year is $6,728, up from $6,660, in the event that you have at least three children. In the event that you fall within the rules and criteria for the credit, make certain to guarantee it on your return when you do your taxes. And in the event that you didn’t guarantee the earned income credit when you documented your duties over the most recent three years yet you think you qualified for it, the IRS urges you to tell it so you can get that cash back.
Understanding the earned income credit
The earned income credit, otherwise called the earned income tax credit (EITC) was acquainted with keeping families out of destitution while urging everybody to work. The EIC is simply accessible to low-pay workers and some center pay families. Family units that meet all requirements for the EIC can diminish their assessment risk to nothing, in which case they will owe no annual duties and will be discounted any charges that were retained during the year. In the event that the personal assessment owed is decreased to under nothing, the public authority will give a duty discount for the distinction.
How do tax credits work?
A tax credit diminishes the estimation of a citizen’s obligation, dollar for dollar. For instance, a person with a tax bill of $2,900 who can guarantee a $529 credit will owe $2,900 – $529 = $2,371. That lower sum is the complete amount the citizen should pay to the Internal Revenue Service (IRS) for the year. A tax reduction, contingent upon its size, may even qualify the citizen for a refund of taxes paid during the year.
The EIC is perhaps the main tax credit accessible to individual taxpayers. The measure of credit that any one individual can guarantee relies upon the individual’s yearly pay procured for the assessment year and the quantity of qualified dependents that the citizen has. A certified and eligible dependent, as per the IRS, is a kid that is identified with the citizen by birth, reception, or cultivating. The child can likewise be a sibling or the offspring of a sibling, for example, a niece or a nephew. A qualified and eligible dependent ought to be younger than 19 or 24 if he/she is a full-time student. Regardless, the citizen should be older than the dependent, except if the dependent is completely handicapped.
How does earned income credit work?
The earned income tax credit (EITC) offers considerable help to low-and direct pay working guardians, however next to no help to laborers without qualifying youngsters (frequently called childless specialists). Laborers get a credit equivalent to a level of their income up to a greatest credit. Both the credit rate and the most extreme credit shift by family size, with bigger credits accessible to families with more kids. After the credit arrives at its most extreme, it stays level until income arrives at the phaseout point. From that point, it decreases with each extra dollar of pay until no credit is accessible.
The EITC is determined by a percentage of income called the credit rate. Citizens with the least pay and biggest families get a more noteworthy credit subsequently. The credit eliminates altogether until it isn’t accessible to those with earnings over specific cutoff points dependent on documenting status.
By plan, the EITC just advantages working families. Families with kids get a lot bigger credit than laborers without qualifying children. (A passing youngster should meet prerequisites dependent on relationship, age, residency, and assessment documenting status.) In 2020, the greatest acknowledge for families for one kid is $3,584, while the most extreme acknowledge for families for at least three kids is $6,660.
Both your earned incomes and your adjusted gross income (AGI) should be not exactly a specific edge to meet all requirements for the EITC. Your AGI is your earned income excluding certain adjustments for money that you don’t need to pay burdens on, for example, IRA commitments. Your AGI shows up on line 11 of the 2020 Form 1040. Your AGI probably been not exactly these sums in 2020 in the event that you utilize the single, head of family, or qualifying single man recording status:
- $50,954 on the off chance that you have at least three qualifying children
- $47,440 on the off chance that you have two children
- $41,756 in the event that you have one children
- $15,820 in the event that you have no children
Income limits increment for wedded citizens who record joint re-visitations of the accompanying sums:
- $56,844 on the off chance that you have at least three qualifying children
- $53,330 in the event that you have two kids
- $47,646 in the event that you have one kid
- $21,710 in the event that you have no kid
Investment pay can’t surpass $3,650 as of assessment year 2020. This incorporates revenue, profits, capital increases, and eminences. It very well may be accounted for on a 1099-MISC or, for profits, on Form 1099-DIV. The establishments where you hold speculations or records ought to send you duplicates of these structures soon after the first of the year.
As opposed to the generous credit for laborers for kids, childless specialists can get a most extreme credit of just $538. Additionally, the credit for childless laborers eliminates at much lower earnings. Likewise, childless specialists should be at any rate 25 and not more seasoned than 64 to fit the bill for an appropriation—limitations that don’t matter to laborers with kids. Because of these more tight standards, 97 percent of advantages from the credit go to families with children.
Earned income credit qualifications
Laborers with a low-to-moderate salary with qualifying kids might be qualified to guarantee the Earned Income Tax Credit (EITC) if certain passing standards apply to them. You may meet all requirements for the EITC regardless of whether you cannot claim children on your assessment form.
To fit the bill for the EIC, a citizen’s acquired pay and adjusted gross income (AGI) should be beneath sure pay limits. Notwithstanding the children capability rules and pay limits needed to qualify a family unit for the EIC, various other qualification necessities should be met. For example, to be qualified, the citizen should be between the ages of 25 and 65 and live in the U.S. for the greater part of the tax year if the individual doesn’t have qualifying dependents. Other than remaining beneath the income brackets, there are other capability rules and necessities. Here are the large qualification rules for the earned income tax credits.
- You should have in any event $1 of earned income (benefits and joblessness don’t check).
- Your speculation pay should be $3,650 or less.
- You can’t guarantee the earned income tax credit in case you’re hitched recording independently.
- You should not record Form 2555, Foreign Earned Income; or Form 2555-EZ, Foreign Earned Income Exclusion.
Basic qualifying rules
To qualify for the EITC, you must:
- Show verification of your earned income
- Have investment income underneath $3,650 in the assessment year you guarantee the credit
- Have a substantial Social Security number
- Guarantee a specific documenting status
- Be a U.S. resident or an inhabitant outsider throughout the year
Special qualifying rules
The EITC has special qualifying rules for:
- Taxpayers and their relatives with disabilities
- Clergy members
- Military members
To fit the bill for the EITC, each individual you claim on your assessments should have a legitimate Social Security number (SSN). To be substantial, the SSN should be:
- Legitimate for work
- Given before the due date of the assessment form you intend to guarantee (counting augmentations)
For the EITC, we acknowledge a Social Security number on a Social Security card that has the words, “Legitimate for work with DHS approval,” on it. For the EITC, the accompanying won’t be acknowledged:
- Individual taxpayer identification numbers (ITIN)
- Adoption taxpayer identification numbers (ATIN)
Federal retirement aide numbers on Social Security cards that have the words, “Not Valid for Employment,” on them
To qualify for the EITC, you must file your tax return using one of the following statuses:
- Head of household
- Married filing jointly
- Qualifying widow or widower
You can’t guarantee the EITC if your recording status is hitched documenting independently. You may guarantee the Head of Household recording status in case you’re not hitched and pay the greater part the expenses of keeping up your home where you reside with your passing youngster.
Qualifying widow or widower
To record as a qualifying widow or widower, all the accompanying should concern you:
- You might have recorded a joint get back with your mate for the assessment year they kicked the bucket. It doesn’t make any difference in the event that you recorded a joint return
- Your spouse passed away less than 2 years prior to the tax year you’re guaranteeing the EITC and you didn’t remarry before the finish of that year
- You paid the greater part of the expense of keeping up a permanent place to stay for the year
- You have a kid or stepchild you can claim as a family member. This excludes a foster child.
- This child lived in your home the entire year, aside from brief absences.
How to claim your earned income credit?
Sign into myAccount to guarantee this credit or complete a Form 11. In the wake of signing into myAccount select:
- PAYE administrations
- Deal with your assessment 2021
- Add new credits.
To guarantee the EITC, you and your life partner (if documenting mutually) should be U.S. residents or occupant outsiders. In the event that you or your spouse were foreigners for any piece of the tax year, you can possibly guarantee the EITC if your recording status is married filing together and you or your life partner is a:
- S. Resident with a substantial Social Security number or
- Foreigner who was living in the U.S. for almost half a year of the year you’re petitioning for and has a legitimate Social Security number
You are qualified to guarantee the EITC without a qualifying kid in the event that you meet all the accompanying guidelines. You (and your life partner in the event that you document a joint assessment form) must:
- Meet the EITC essential qualifying rules
- Have your fundamental home in the United States for the greater part the expense year
- The United States incorporates the 50 expresses, the District of Columbia and U.S. army installations. It does exclude U.S. possessions, for example, Guam, the Virgin Islands or Puerto Rico
- Not be claimed as a qualifying child on any other person’s assessment form
- Be at any rate age 25 yet under age 65 toward the finish of the expense year (generally Dec. 31)
You are not qualified to guarantee the EITC if:
- Your documenting status is married filing separately
- You documented a Form 2555 (identified with unfamiliar acquired pay)
- You or your spouse are foreigners.
Kids and the earned income tax credit
In the event that you claim at least one kids as a component of your acquired pay credit, each should breeze through specific assessments to qualify:
- The kid can be your child, little girl, received youngster, stepchild, foster kid or grandkid. The kid likewise can be your sibling, sister, relative or stepsister, stepbrother or stepsister or any of their kids (your niece or nephew).
- The kid should be under 19 toward the year’s end and more youthful than you or your companion in case you’re documenting together, OR the kid should be under 24 on the off chance that the individual in question was a full-time understudy. There’s no age limit for children who are for all time and completely debilitated.
- The child probably lived with you or your life partner in the United States for the greater part the year.
For every kid you’re claiming with the EIC, you’ll additionally require:
- A Social Security number (make certain to utilize the kid’s name and Social Security number precisely as they show up on the Social Security card)
- Their birthdate
You might have the option to get the EIC on the off chance that you don’t have a qualifying child however meet the pay prerequisites for your recording status. To qualify, you should meet three additional conditions:
- You probably lived in the United States for the greater part the year.
- Nobody can guarantee you as a dependent or qualifying child on their assessment form.
- You should be at any rate 25 years old or under 65 toward the year’s end.
Pros and cons of the earned income tax credit
Given below are the pros and cons of the earned income tax credit:
- It gives charge alleviation to low-pay laborers. The qualification prerequisites of the EITC are intended to give more cash to the individuals who need it most. The expectation is that the EITC will likewise help lessen destitution and neutralize cases of regressivity in the assessment code.
- It urges citizens to work. You probably acquired pay to fit the bill for this tax credit. Studies have discovered that, since its initiation, profits by the EITC reliably energized labor force interest by a single month.
- You’ll have to wait longer for your tax credit. The Protecting Americans from Tax Hikes (PATH) Act necessitates that the IRS should hold discounts that guarantee this credit until in any event Feb. 15 every year. This permits the public authority some an ideal opportunity to research the chance of deceitful cases, yet additionally implies numerous Americans should stand by longer for their tax refunds.
- It’s a troublesome credit to ascertain. You may have to look for proficient assistance to guarantee the EITC in light of the fact that it’s among the most muddled tax breaks to figure—if not the most confounded. Basic mistakes individuals frequently make incorporate asserting a youngster who doesn’t qualify, documenting as single when hitched, detailing erroneous costs, and incorrectly revealing your Social Security number. On the brilliant side, the IRS offers the Free File program for lower-pay citizens, and these product suppliers can help you.
Not exclusively does a mistake on your tax document postpone the EIC part of your discount — once in a while for a while — yet it likewise implies the IRS could deny the whole earned income credit. On the off chance that the IRS denies your entire EIC guarantee:
- You should take care of any EIC sum you’ve been paid in mistake, in addition to interest.
- You may have to document Form 8862, “Data to Claim Earned Income Credit After Disallowance,” before you can guarantee the EIC once more.
- You could be restricted from asserting EIC for the following two years if the IRS discovers you recorded your get back with “crazy or deliberate negligence of the principles.”
- You could be restricted from asserting EIC for the following 10 years if the IRS discovers you recorded your return deceitfully.
Most tax softwares takes you through the EIC with a progression of inquiries questions, extraordinarily streamlining the interaction. (Furthermore, on the off chance that you fit the bill for the EIC, you could possibly get free expense programming.) But recollect: Even in the event that another person readies your return for you, the IRS considers you liable for all data on any return you submit.
Some facts about EITC
Here are five facts about the EITC all taxpayers should know.
Eligibility is limited to low-to-moderate income earners
The overall qualification rules for the EITC are genuinely clear:
- Citizens should record as people or married filing together.
- Whenever married, you, your companion and your qualifying kids should have legitimate Social Security numbers.
- You should likewise be 25 or more established yet more youthful than 65.
Self-employed still counts
Numerous filers, particularly independently employed people, neglect to exploit credits since they think they are ineligible. The IRS considers all pay that is procured qualified for the credit. That incorporates:
- Union strike benefits
- Long haul inability benefits got before least retirement age
- Net profit from independent work
- Net pay got as a legal worker (a self employed entity under custom-based law rules)
Sorts of pay that don’t qualify as acquired pay for the credit include:
- Retirement pay
- Federal retirement aide benefits
- Child Support
- Unemployment benefits
- Income received for work while in jail
Investment income can render you ineligible
In 2020, pay got from ventures precludes you in the event that it is more noteworthy than $3,650 in one year, including pay from stock profits, investment properties or legacy.
Eligibility criteria changes
Taxpaying citizens should focus on their EITC qualification each documenting year as tax laws and individual assessment circumstances can change. Changes that could influence your qualification for the EITC can incorporate
- a new position,
- loss of a yearly reward,
- a change in conjugal status, or
- an adjustment in a life partner’s business circumstance.
Tax software can help
Electronic tax programs offer a favorable position over conventional pen and paper tax preparation and arrangement on the grounds that, as long as you enter your data precisely, they guarantee that you get the tax credits you merit. Since the EITC is perhaps the most worthwhile credit accessible to battling Americans, filers ought to consider utilizing a certified assessment programming framework like TurboTax to boost the procured pay credit.
Now that you have read this article, you know all about what is earned income credit. The EITC is a tax credit expected to lower or altogether kill the tax paid by individuals with a low-and moderate-income. Like all the other things related with the IRS, it doesn’t pay to be exploitative. The IRS may diminish or even deny a filer’s admittance to the Earned Income Tax Credit for various years if the office decides the filer submitted misrepresentation or ridiculed the principles to get the credit.
On the off chance that the IRS finds that somebody carelessly dismissed the guidelines to build the credit, it might restrict the filer from accepting the credit for a very long time, after which the filer would need to document an exceptional solicitation structure to apply for the option to guarantee the credit. In the occasion the IRS decides a filer has provided fake monetary data to guarantee the EITC, it might punish the filer by prohibiting the credit for a very long time.