What's the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is a credit the federal government offers to taxpayers who earn low-to-moderate wages. This refundable credit can be a significant source of income for parents, and low-income taxpayers without children can claim a smaller credit. While the EITC was created in 1975 to assist low-income families, it has evolved over the last 40-plus years to offer advantages to single filers also. Individuals who are 25 and older and annually earn less than $15,820 can qualify for a refund of as much as $538 through this credit.
The credit is refundable, meaning it can lower your tax bill, and when lowering below $0 it can also generate a refund for you. Both single and married people, with and without qualifying dependents, may qualify for the EITC as long as they earn some income in the applicable tax year. It is eligible for taxpayers who are employed by an employer and also self-employed. You must file a tax return to claim an EITC, even if you're otherwise not obligated to file a return.
The EITC's basic qualifying standards are the same as with any other deduction or credit. You need to have a social security number, the names and social security numbers of your dependents, and your W-2, 1099, as well as all other documents stating income. You also must have been a U.S. citizen or legal resident alien during the previous tax year to quality for the tax credit. If you wish to file online, you will need last year's tax return handy because you'll also need information such as your adjusted gross income, to electronically sign your filing.
The IRS has income thresholds that determine whether you qualify for the EITC. For the tax year ending December 31, 2020, income must not have exceeded $15,820 for single filers with no dependents, and $21,710 if you're married filing jointly, and have no dependents. Single people with one dependent can earn up to $41,756, up to $47,440 with two dependents, and up to $50,594 with three or more dependents. Married people filing jointly with one dependent can earn up to $47,646 and still claim the EITC. Those with two dependents can earn up to $53,330, and those with three dependents can earn up to $56,844.
How much is the earned income credit for 2020?
- $6,660 with three or more qualifying dependents
- $5,920 with two qualifying dependents
- $3,584 with one qualifying dependent
- $538 with no dependents
For those with dependents, the credit can be substantially more. Unfortunately, the IRS notes that nearly 20 percent of those eligible for the EITC fail to claim it. There are a few causes for someone not to be eligable for this credit. For example, if you earn income from investments, more than $3,650 annually, you won't qualify. You also don't qualify if you claim foreign income on your U.S. tax return. In additional to the EITC, if you qualify for the Additional Child Tax Credit, you can still claim the EITC, but the IRS may postpone your refund until after March 1.
Earned Income Tax Credit Eligibility Checklist
Here is a "due diligence" checklist gleaned from IRS Form 8867 and IRS Publication 3524 designed to determine eligibility:
- Complete the EIC (Earned Income Credit) and/or the CTC/ACTC (Child Tax Credit/Additional Child Tax Credit) worksheets on any Form 1040 and/or the American Opportunity Tax Credit (AOTC) worksheet on Form 8863.
- Ensure everyone listed on the return, including dependent children, has a valid Social Security number. There is a separate procedure for filing with Individual Taxpayer Identification Numbers (ITIN) or Adoption Taxpayer Identification Numbers (ATIN).
- Understand variables between filing jointly, as head of household, as a widow(er) or as a single adult. Consult IRS Publication 501 for ascertaining filing status. Those filing as "married filing separately" do not qualify for the EITC.
- Do not file for an EITC if investment income exceeds $3,650.
- Accurately document verifiable income. To qualify, total earned adjusted gross income (AGI) must be at least $1 (see below for more information on income limits).
- Ensure the child or children being claimed as dependents are not also being claimed by someone else on another return. This can be an issue among former spouses or among relatives. If more than one person claims the same child, a mistaken filer must return the credit with penalties and interest. There are "tie-breaker rules" on Form 3524 to help answer any questions.
- Do not file for an EITC unless a child permanently lives in a home within the United States. There are special rules that apply for temporary absences, kidnapped children and for military dependents on extended duty outside the U.S.
- File for an EITC for totally and permanently disabled adults that live in the household as if for a dependent child.
The EITC 'Delay'
With the adoption of the Protecting Americans from Tax Hikes (PATH) Act in 2015, the IRS will no longer issue tax returns that claim the EITC or ACTC until after Feb. 15. The PATH Act provides more time for the IRS to review and validate EITC claims.
What are some reasons you may not qualify for the Earned Income Credit?
You must complete Schedule EIC and file it with your tax return to claim the EIC. Sometimes, though, the IRS may reject your claim. Common reasons for rejection include:
- Your age – You must be between the ages of 25 and 64 if you are claiming the EIC without a qualifying child.
- Your children's qualifying status – A child must meet four tests to be a qualifying child for the EIC.
- Too little Adjusted Gross Income – If your AGI is zero or less, you are not eligible for the EIC.
- Too much earned income – Self-employment income is treated differently than W-2 income for the EIC. In some cases, you may appear to qualify for the credit based on your AGI but be ineligible because your earned income exceeds the limit. This often occurs when self-employed taxpayers contribute to a solo 401(k) or another retirement savings plan.
- Too little earned income – Only earned income counts toward the credit. As a result, much of your income may not be counted in determining your eligibility to claim the EIC. Some of the income types of income that are not counted include:
- Child support
- Unemployment compensation
- Social Security benefits
- Pensions and annuities
- Pay received for work performed while incarcerated
- Interest and dividends
- Too much investment income
- Receiving investment income in an amount that is even one dollar over the allowed limit can also prevent you from qualifying for the EIC, even if you would be eligible based only on your earned income. For tax year 2020, if you receive over $3,650 in investment income then you are not eligible to claim the EIC.
- Citizenship status – You must be a U.S. citizen or resident alien for the entire year to claim the EIC.
- Filing status – You cannot claim the EIC if you are married filing separately. Also, you cannot claim the credit if you are the qualifying child of another taxpayer.
- Missing Social Security Numbers – You must include a valid SSN for yourself and everyone you are claiming on your tax return. You cannot claim the EIC using other types of taxpayer identification numbers or SSNs that are not valid for employment.