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Earned Income Tax Credit

The Earned Income Tax Credit (EITC) helps workers with low to moderate income reduce their federal tax bill.

What is the Earned Income Tax Credit (EITC)?

The Earned Income Tax Credit, or EITC, helps workers with low to moderate income reduce their federal tax bill. Qualification for the credit is subject to both an earnings floor and an earnings ceiling. In other words, you can only get the credit if you earned some income during the year from a job, and it falls within a precise range for your filing status.

How Does the Earned Income Tax Credit Work?

  • The IRS determines eligibility for the EITC when you file your tax return.
  • Eligibility is based on citizenship and residency status, earned income, adjusted gross income, filing status, and number of dependents.
  • There is an earnings floor and an earnings ceiling to qualify for the credit.
  • Married filers can have higher income than single filers and still qualify for the credit.
  • People with qualifying children can also have higher income than people without children and still qualify for the credit.
  • The maximum credit amount for 2021 ranges from $1,502 for taxpayers without children to $6,728 for taxpayers with three or more children.
  • When the credit is larger than the amount of tax owed, the difference becomes a tax refund.

Read More: Tax Deduction vs. Tax Credit: What’s the Difference

Earned Income Tax Credit Examples

With Children: Jane and John, a married couple, have two young kids. Together the couple earned $50,000 in wages in 2021. Their adjusted gross income (AGI) is $48,000. The couple qualifies for a maximum credit of $5,980 because their earned income and their AGI fall below the income ceiling of $53,865 for married filers claiming two children.

If the couple owes any taxes when they file their federal return, the amount will be reduced by their credit. What’s left over will become their tax refund, plus any other refundable credits they qualify for.

Without Children: Thomas is a single filer with no children. He works in the gig economy and earned $20,000 in 2021. His AGI was $19,000. Thomas qualifies for a maximum credit of $1,502.

But let’s say Thomas also collected $10,000 in unemployment benefits in 2021. That amount gets added to his AGI, bringing it to a total of $29,000. He’s now above the AGI ceiling for single filers, which is $21,430 for 2021. In this case, he wouldn’t qualify for any Earned Income Tax Credit.

What is the Income Limit for the Earned Income Tax Credit?

To qualify for the Earned Income Tax Credit without children, you need to have AGI and earned income under $21,430 as a single filer and $27,380 as married joint filers. Those income ceilings increase if you claim children.

For 2021, Congress expanded EITC eligibility and increased the maximum credit amount for childless workers. And a special rule allows taxpayers who had higher earned income in 2019 than 2021 to use their 2019 income to claim the EITC.

2021 income limits (for taxes you file in 2022)

Number of Qualifying Children Maximum AGI for Single, Head of Household, or Married Filing Separately Maximum AGI for Married Filing Jointly
0 $21,430 $27,380
1 $42,158 $48,108
2 $47,915 $53,865
3 or more $51,464 $57,414

 

2022 income limits (for taxes you file in 2023)

Number of Qualifying Children Maximum AGI for Single, Head of Household, or Married Filing Separately Maximum AGI for Married Filing Jointly
0 $16,480 $22,610
1 $43,492 $49,622
2 $49,399 $55,529
3 or more $53,057 $59,187

 

Read More: 11 Tax Changes for 2022

The size of your EITC depends on your filing status, earned income, AGI (your gross income with a few adjustments), and how many qualifying children you have, if any. You can estimate how much you could get using the EITC Assistant tool on the IRS website.

Earned income is income from a job where your paycheck is subject to tax withholding, or income for which you pay estimated taxes, such as self-employment or business earnings. Economic Impact Payments and advanced Child Tax Credit payments don’t count toward your earned income total.

Who Qualifies for the Earned Income Tax Credit?

Here are the basic eligibility requirements for claiming the EITC in 2021:

  1. You have taxable wages, salary, tips, self-employment income, or other types of earned income.
  2. Your earned income and your AGI are below the limit for your filing status and the number of qualifying children you have, if any (see chart above).
  3. Your investment income is $10,000 or less.
  4. You have a valid Social Security number as of your tax return deadline, including any extensions.
  5. You were at least 19 years old at the end of the tax year, or at least 24 years old and a student.
  6. You are not claimed as a dependent or qualifying child on someone else’s tax return.
  7. You were a U.S. citizen or resident alien for the entire year.
  8. You are not claiming the Foreign Earned Income Exclusion on Form 2555.

Additionally, the following rules apply to taxpayers who claim children:

  1. Each child needs to meet the age, residency, relationship, and joint return requirements.
  2. Each child must only be claimed on one tax return for purposes of the EITC.

Here are a few examples of taxpayers who might qualify for the credit in 2021:

  • A single mom (a head of household filer) with two qualifying children and AGI of $40,000.
  • A married couple (joint filers) with no children and AGI of $25,000.
  • A married couple (joint filers) with four children and AGI of $57,000.

Military members, clergy members, and taxpayers and their relatives with disabilities have special eligibility rules.

Tip: Get a handle on your money with Personal Capital’s free financial dashboard. You get a quick overview of your net worth, cash flow, investment allocation, and more. You can also plan for long-term goals like funding a child’s education or retiring.

How Do You Claim the Earned Income Tax Credit?

The only way to claim the EITC is to file a federal tax return, even if you don’t owe any taxes. You can claim the EITC on Form 1040. Use Schedule EIC if you have qualifying children.

How to Avoid Common Errors

There’s more room for error if you claim the EITC with children because you have to provide proof of their eligibility for the credit, in addition to your own.

Here are a few common errors, according to the IRS, and how to avoid them:

  • Your child doesn’t qualify: Check that your child passes the age, residency, relationship, and joint return requirements before claiming them for the EITC. Note that the IRS won’t accept individual taxpayer identification numbers, adoption taxpayer identification numbers, or Social Security cards that say “not valid for employment.” If your children have any of these taxpayer numbers instead of a Social Security number that’s valid for employment, your claim for a bigger EITC may be rejected.
  • More than one person claimed a child: While preparing your tax return, ensure that no one else, such as a grandparent or former spouse, is planning to claim the child for the EITC this year. Only one person can claim a child per tax year.
  • A child’s Social Security number and name don’t match: Write the name of the child on your tax return exactly as it appears on their Social Security card.
  • You didn’t follow the rules for your filing status: Beginning with the 2021 tax year, married people who are filing taxes separately can each claim the EITC as long as they are legally separated and didn’t have the same principal residence for at least six months of the year. Only one person can claim a qualifying child per year.
  • You misreported income: Report all income, including what’s listed on your W-2s and 1099s, as well as anything not reported on an IRS form, such as cash income from a side business.

What to Do if Your Claim Has Been Denied

If the IRS needs more information to determine your eligibility for the EITC, you may get a notice in the mail requesting proof of residency or other details for you or any children you’re claiming.

If your claim for the EITC has been denied entirely, the IRS might require you to repay any credit you already received, plus interest. The next time you want to claim the credit, you may need to file Form 8862 with your tax return. In situations where a taxpayer intentionally disregards the rules for claiming the EITC, the IRS can ban them from claiming the credit for two to 10 years.

Disability and the Earned Income Tax Credit

There are two exceptions to EITC rules for disabled people or taxpayers who claim disabled people as dependents:

  1. Earned income sources: For purposes of claiming the EITC, disability retirement benefits you get before you reach the minimum retirement age are considered earned income. Other disability payments, including Social Security disability and Supplemental Security Income, do not count toward your earned income total for the EITC.
  2. Age requirement: A child must be under age 19 to be considered a qualifying child for the EITC, except if they are totally and permanently disabled.

Children and the Earned Income Tax Credit

Taxpayers with qualifying children can get a bigger credit than people with no children. There’s an extra form to fill out with your tax return if you’re claiming one or more children called Schedule EIC.

This form is where you list their name, Social Security number, birth date, residency status, and relationship to you. The IRS uses this information to calculate your credit amount.

Here’s the maximum credit amount available for 2021 based on the number of qualifying children you claim:

  • 1 child: $3,618
  • 2 children: $5,980
  • 3 or more children: $6,728

Earned Income Tax Credit Without Children

The EITC for people without qualifying children was boosted for 2021. The maximum credit available is $1,502, nearly triple its value from the previous year.

The following taxpayers qualify for the self-only EITC:

  • Single filers with less than $21,430 of earned income and AGI
  • Married filers with $27,380 of earned income and AGI
  • Any filer who lived in the U.S. for more than half of the year
  • Any filer who is at least 18 who is a qualified former foster youth or a qualified homeless youth
  • A specified student who is at least 24 years old

If You Qualify for the EITC, You May Also Qualify for Other Tax Credits

Child Tax Credit

The Child Tax Credit (CTC) is for parents and caregivers of dependents under age 18. For 2021, it’s worth up to $3,000 per child ages six to 17 and $3,600 per child under age six. Many families received half of their credit as advance monthly payments in 2021. Any remaining credit is available when they file their annual tax return.

There’s no minimum income requirement to be eligible for the credit this year. The maximum income requirement to get the boosted credit is $112,000 for single parents and $150,000 for married couples who file taxes jointly. People with higher incomes can qualify for a smaller credit.

Child and Dependent Care Credit

The Child and Dependent Care Credit was also temporarily enhanced for the 2021 tax year. Taxpayers with AGI below $438,000 are eligible to claim the credit if they paid for the care (nannying, schooling, or other childcare services) of eligible children and other dependents while they worked or looked for work in 2021.

Up to 50% of the amount spent on care services can be claimed as a credit, up to $4,000 for one qualifying child and $8,000 for two or more qualifying children. The credits are refundable if your main home was in one of the 50 U.S. states for more than half of the year.

Education Credits

The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) are available to students or parents of students who paid for education-related expenses during the tax year. Visit the IRS website for eligibility requirements.

Recovery Rebate Credit

If you didn’t get the third Economic Impact Payment in 2021, or only received part of it, you may be eligible to claim the Recovery Rebate Credit on your tax return this year. The maximum credit is $1,400 per person claimed on a tax return.

Next Steps

It’s time to file your 2021 tax return. Check out our guide to filing your taxes for deadlines, common deductions, ways to file, and a list of documents you may need to prepare your return.

 

Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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