What is the Earned Income Tax Credit (EITC) ?
The Earned Income Tax Credit (EITC or EIC) is a refundable tax credit for low- and middle-income workers. The earned income tax credit is a work credit that can reduce the federal taxes you owe or give you money back at tax time. The main requirement for EITC is that, you have to earn money from the job.
The EITC is a refundable tax credit to help American taxpayers with low income by reducing the tax amount on a dollar-by-dollar basis. Taxpayers may be eligible for a refund if the tax credit exceeds their tax liability for the year.
The credit can eliminate any federal taxes you owe at tax time. You get the money back in your tax refund if the Earned Income Tax Credit amount exceeds the amount owed in your taxes. You can get a refund even if you don't pay income tax, if you qualify for the credit.
If you fall under the guidelines for EITC, be sure to claim it on your return when doing your taxes. If you haven't claimed the earned income credit when filing your taxes in the last three years, the IRS encourages you to state it (if you believe you qualify for it) so that you can get that money back.
The earned income tax credit is a tax credit for low-income households. For tax year 2020, a family of four (in which the couple is married and filing jointly) must have earned less than $53,330 per year to qualify for a potential tax credit of $5,920.
More than 22 million individuals and households obtained EITC in 2018. The average credit for a family with children was $3,191.
In 2018, CREDIT lifted nearly 3 million children and 5.6 million people out of poverty. The enacted legislation recognized that the income of many taxpayers that year in 2020 was less than their income in 2019 due to the COVID-19 economic crisis and lockdown, this law allows taxpayers to pay EITC claimed on their 2020 tax return on their 2019 or 2020 income allows to base.
The earned income credit ranges from $1,502 to $6,728 for the 2021 tax year, depending on tax-filing status, number of children, and income. People without children can qualify. The law liberalizes EITC rules for 2021 tax returns and provides an increased EITC for more childless taxpayers.
Understanding the Earned Income Tax Credit (EITC)
Earned Income Tax Credit (EITC), also known as Earned Income Credit (EIC). This is being seen as an anti-poverty tax benefit. The EITC has been conceived as a "work bonus plan" to help offset the effects of supplementing Social Security taxes and wages of low-income workers. EITC is one of the most important tax credits for individual taxpayers.
EITC is available only to low-income and middle-income taxpayers, whether or not they have eligible dependents. To claim the credit for the 2021 tax year, an individual taxpayer (the individual or their spouse, filing jointly or the taxpayer is married) must have lived in the United States for more than half the time and the taxpayer's age. Must be at least 19 years old.
Generally for 2021, eligible dependents include disabled or student dependents below the age of 24 and dependent children below the age of 19 years. While the credit percentage, income cap, and credit amount vary according to the number of dependents and the taxpayer's filing status, these factors also determine the income staged threshold at which the credit becomes zero. No credits exceeding the maximum limit are allowed for the phaseout range.
To be eligible for the earned income tax credit, an individual taxpayer must have income but cannot exceed a specified level of investment income, which is set at $10,000 for 2021. Residence, age, and relationship requirements also apply with respect to qualifying dependents. A taxpayer can be eligible for a refund only if the amount of EITC exceeds the amount of tax payable by the taxpayer. The credit reduces the amount of tax on a dollar-for-dollar basis.
To qualify for the EITC in 2021, a taxpayer must have a valid Social Security number as of the tax return due date and have been a U.S. citizen or a resident alien for the entire year. The amount of credits that can be claimed on a tax return depends on the taxpayer's annual earned income for the tax year and the number of eligible dependents and filing status.
Key Features of EITC
- The Earned Income Tax Credit is used to supplement the wages of low-income workers.
- The Earned Income Tax Credit helps offset the impact of Social Security taxes.
- EITC is available only to low- or middle-income taxpayers, whether or not they have eligible dependents.
- To be eligible for EITC, a taxpayer must have earned income during the tax year, however, investment income cannot exceed a specified level.
- The American Rescue Planning Act (ARPA) revised several EITC rules for the 2021 tax year.
What is the purpose of EITC service ?
The main purpose of EITC is to make a tax break for hardworking people.
What Services are Offered ?
- Free Tax Help - DHS 4039
- You may qualify for a larger federal income tax refund.
- Illinois also has a State EITC. Illinois residents who claim the federal EITC may also get a State EITC which can be worth up to $627. The State EITC is worth 10 percent of the federal EITC and is fully refundable.
- Claim Your Earned Income Tax Credit (EITC) 4406E/S
- Reclame Su Credito Tributario Por Ingresos Del Trabajo (EITC) 4406E/S
How Does the Earned Income Tax Credit Work ?
Here are some facts about the EITC :
- The IRS determines eligibility for EITC (at the time you file your tax return).
- Eligibility is based on residency status, citizenship, adjusted gross income, earned income, number of dependents, and filing status.
- There is an earning ceiling and earning floor to qualify for the credit.
- People with eligible children may have a higher income (compared to people without children), still qualify for the credit.
- Married filers may have higher incomes (than single filers), yet they may qualify for the credit.
- When the credit is greater than the amount of tax owed, the difference becomes a tax refund.
- For the 2021 tax year (the tax return you'll file in 2022), the amount of children you have and the earned income credit ranges from $1,502 to $6,728, depending on your filing status.
- You can use your 2019 income to calculate your EITC when your 2019 income is more than your 2021 income.
- The IRS cannot by law issue your refund until mid-February (if you claim the EITC).
- The Earned Income Tax Credit does not simply deduct the amount of tax payable by you. The EITC can also give you a refund and, in some cases, a refund that is higher than what you actually paid in taxes.
Changes in the EITC for 2021 Tax Returns
ARPA revised several EITC rules for the 2021 tax year and increased the EITC amount and eligibility rules for taxpayers with no qualifying dependents. The 2021 income limit has increased due to inflation, with credit limits and phased limits for all eligible taxpayers.
Phased out and credit rates increased from 7.65% to 15.3% for taxpayers without qualifying dependents. The phased out amount and maximum earned income amount for the credit increased to $11,610 and $9,820, respectively. In addition, the law lowered the age limit for taxpayers to 19 and raised the investment income limit to $10,000. Similar to the Special Economic Distress Relief Rule for 2020 returns, returns filed for the 2021 tax year are allowed to base the credit on the taxpayer's income for 2019 or 2021.
Who Is Eligible For Earned Income Tax Credit ?
The most important eligibility requirement for EITC is some kind of earned income (this means taxpayers have to work). The exact amount depends on your filing status and how many children you have. Earned income does not include dividend payments or interest, nor money you received from annuities, pensions, alimony, unemployment insurance (UI) or child support.
Apart from living below the income limit, there are other eligibility and rule requirements for EITC eligibility. You can check out the qualifications and rules below to find out whether you can qualify for the Income Tax Credit that you earned. Here are the basic eligibility requirements for claiming the EITC :
- You must have taxable wages, tips, salaries, self-employment income or other types of earned income.
- Your investment income must be $10,000 or less.
- You must be at least 19 years old at the end of the tax year and at least 24 years old if a student.
- You are not claimed as a qualified child or dependent on someone else's tax return.
- You are not claiming the foreign earned income exclusion on Form 2555 (or Form 2555-EZ, Foreign Earned Income Exclusion)
- Be considered a U.S. citizen or resident alien for the entire year.
- You must have a valid Social Security number (including any extensions) by the deadline of your tax return.
- If married but separated, you may qualify for EITC but to do so, your child must have lived with you for more than half a year and you cannot file a joint tax return. You also must not have lived with your spouse during the past six months or you must have a decree or separation agreement.
- Your AGI is limited by your filing status, your earned income, and the number of eligible children (if any) you have (see chart).
The following rules apply to taxpayers who claim children :
- Each child needs to meet residency, age, relationship and joint withdrawal requirements.
- For the purposes of EITC, each child must be claimed on only one tax return.
If you don't have children, eligibility requirements look a little different from other taxpayers, so the IRS requires the following :
- Live in the U.S. (for more than half of the tax year)
- Won't be claimed as a qualifying child on another's tax return
- You must be at least 18 years of age at the end of the year if you were in foster care or were previously homeless, and at least 24 years of age if you were a full-time student during the tax year or at least 19 in all other cases.
Who Qualifies For The Earned Income Tax Credit ?
Here are some examples of taxpayers who may qualify for the credit :
- A single mom (a head of household filer) with two qualifying children and AGI of $40,000.
- A married couple (joint filers) with four children and AGI of $57,000.
- A married couple (joint filers) with no children and AGI of $25,000.
There are special eligibility rules for clergy members, military members, taxpayers, and their disabled relatives.
Income Limit For The Earned Income Credit (EIC)
The table below contains the maximum earned income tax credit amounts, as well as the maximum amount you can earn before losing profits entirely.
Earned Income Tax Credit 2023 (for taxes due in April 2024)
|
Number of children |
Maximum earned income tax credit |
Max AGI, single or head of household filers |
Max AGI, married joint filers |
|
0 |
$600 |
$17,640 |
$24,210 |
|
1 |
$3,995 |
$46,560 |
$53,120 |
|
2 |
$6,604 |
$52,918 |
$59,478 |
|
3 or
more |
$7,430 |
$56,838 |
$63,698 |
Earned Income Tax Credit 2022 (for taxes due in April 2023)
|
Number of children |
Maximum earned income tax credit |
Max AGI, single or head of household filers |
Max AGI, married joint filers |
|
0 |
$560 |
$16,480 |
$22,610 |
|
1 |
$3,733 |
$43,492 |
$49,622 |
|
2 |
$6,164 |
$49,399 |
$55,529 |
|
3 or
more |
$6,935 |
$53,057 |
$59,187 |
- Both your adjusted gross income and your earned income should be below the table's levels.
- The bigger the earned income credit, the less you earn.
- Your earned income usually includes job salary, wages, tips and other taxable salary you receive from your employer.
- An important note for 2022 : The credit available to individuals with no children decreased significantly in 2022, as you can see, and this is because the American Rescue Planning Act temporarily increased it from $543 to $1,502 in 2021, extending this expansion to 2022. Not carried over to the tax year.
Disability and the Earned Income Tax Credit
There are two exceptions to the EITC rules for taxpayers and people with disabilities who claim people with disabilities as dependents :
Children and the Earned Income Tax Credit
Taxpayers with eligible children may get a larger credit (than those without children). There is an additional form to fill out on your tax return if you are claiming one or more children (called Schedule EIC). This form is where you list their name, date of birth, Social Security number, residency status, and relationship with you. To calculate your credit amount, the IRS uses this information. Here is the maximum credit amount based on the number of eligible children you can claim:
- One child : $3,618
- Two children : $5,980
- Three or more children : $6,728
Earned Income Tax Credit Without Children
The EITC was extended to 2021 for people without eligible children. The maximum credit available is $1,502, which is almost three times more than last year. The following taxpayers qualify for the self-only EITC :
- Single filer with earned income and AGI less than $21,430
- Married filers with $27,380 of earned income and AGI
- Any filer who has been in the U.S. for more than half of the year
- Any filer who is at least 18 years old who is an eligible homeless youth or an eligible former foster youth.
- a specified student who is at least 24 years old
How to apply for Earned Income Tax Credit ?
- You can get EITC only if you apply for it on your federal income tax return.
- And you can still get EITC even if you don't pay federal income taxes.
- To qualify you must have received "earned income" -- including wages reported on Form W-2 or self-employed as reported on Form 1099-MISC or other income.
- File federal Form 1040 or 1040A and attach Schedule EIC, if you were raising children.
- If you were not raising children, file any federal income tax return.
- If you have worked in the last 3 years and you have not claimed EITC in those 3 years but were eligible, you can still apply for EITC benefits by filing an amended tax return.
How To Claim The EITC on Your Tax Return
The only way to claim an EITC is to file a federal tax return (even if you don't owe any taxes). To claim the EITC, you must file a Form 1040 or 1040-SR federal tax return with the IRS. You must also complete Schedule EIC, which requires you to provide Social Security number, the name of your eligible child (if you have a child), date of birth, relationship, age, and residence information. Use Schedule EIC if your children are eligible. If you are using an online tax software provider, it will help complete the forms for you.
Basic Rules of EITC for Claiming
1) Social Security Number :
You, your spouse & any eligible children you list on your tax return must have a Social Security number (to be valid for employment).
2) Filing Status :
You must file :
- Married filing jointly
- Head of household
- Qualifying widow(er)
- Single
- You can't claim EITC if your filing status is “married filing separately”.
If you, your spouse, are a nonresident alien, see IRS Publication 519, U.S. Tax Guide for Aliens (to find out if you are eligible for EITC).
3) Qualifying Child :
If you and your spouse file a joint return and have a child who lives with you, you may be eligible for EITC. Each child you claim must pass the age, relationship, joint withdrawal and residency test to be your eligible child. See the IRS's Eligible Child Rules (for guidance). You must file a Schedule EIC Enlisting Children with Form 1040A or Form 1040 (if you have a qualifying child).
If you and your spouse file a joint return but do not have a qualifying child, you still qualify for EITC if :
- Lived in the United States for more than half of the year.
- You cannot be claimed as a qualified or dependent child on someone else's return.
- You were at least 25 years old but under 65 years of age.
4) Filing Your Tax Return :
You can't get an EITC unless you file and claim a federal tax return.
5) Documents Needed :
You will need the following documents to complete the tax return :
- U.S. social security number verification letter for all individuals listed on a Social Security card or return. Other identities of the government.
- Date of birth for all persons listed in the return.
- Copies of last year's federal and state returns.
- Any refund must have an account number and bank routing number for direct deposit.
- If you purchased coverage through the Health Insurance Marketplace, Form 1095-A, Health Insurance Marketplace Statement.
- All income statements : Forms W-2 and 1099, Social Security, unemployment and other details (such as stocks, pensions, interest) and any documents that withhold taxes. If you run a business or farm or own a farm, you will need documentation of your income.
- Record all expenses (such as mortgage interest, tuition or real estate taxes) If you run a business or farm or own a farm, you will need to document all of your expenses.
- Dependent Child Care Information : The name, address and social security number or other tax identification number of the paid caregiver.