The Earned Income Tax Credit (EITC) is a refundable credit designed to reward working and gives workers with low to moderate incomes a financial boost. The IRS estimates that a 20% of people who are eligible for the Earned Income Tax Credit don’t take it. Frequently these taxpayers are people whose income is below the filing threshold or grandparents who are the primary caretakers of their grandchildren and are not aware that they can claim the credit.
As a refundable credit, you can take the EITC even if you do not owe any federal taxes. Any credit left after zeroing out your tax liability is returned to you as a refund, even if your liability started at zero.
To qualify for the EITC, you must have earned income. This includes any wages or salary from a job, self-employment income, and certain disability benefits. Earned income does not include passive income like interest and dividends. It also does not include Social Security benefits, unemployment benefits, pensions, or child support.
You must also have less than the maximum adjusted gross income (AGI), which varies based on filing status and number of dependents.
To qualify, you must:
File a return, even if you are otherwise not required to do so Have earned income for the year Not claim the Foreign Earned Income Exclusion Have been a U.S. citizen or resident alien for the entire year Have valid social security numbers for yourself, your spouse, and any qualifying children Not have investment income exceeding $3,650 (for 2020) Both your earned income and adjusted gross income (AGI) must be less than the threshold for your filing status and number of qualifying
If you have no qualifying children, you must also:
Be over age 25 but under 65 at the end of the tax year Not qualify as a dependent or qualifying child on somebody else’s return Have lived in the United States more than half the year
For tax year 2020 the income thresholds are:
|Number of Qualifying Dependents||Maximum AGI for Single, Head of Household, or Widowed||Maximum AGI for Married Filing Jointly|
The maximum credit for 2020 is:
|Number of Qualifying Dependents||Maximum Credit Amount|
Special rules and restrictions come into play for individuals receiving disability payments, members of the military or clergy, or if another of the child’s family members also qualifies for the EITC. The IRS EITC Assistant can help you determine your eligibility.
By law, refunds for returns claiming the EITC or the Additional Child Tax Credit cannot be issued before February 15th. If the IRS denies your EITC claim and determines your error was due to intentional disregard for the rules or outright fraud, you can be prohibited from claiming it again for 2 or 10 years respectively.
New for Tax Year 2020
As part of the December COVID-related relief package, you can use your 2019 income to calculate your 2020 EITC if your 2019 earned income was higher. As the EITC is based on your earned income, a higher income will generally result in a larger credit. The provision was created to assist the many taxpayers who were out of work or working reduced hours in 2020.
Confused? That’s why you have us! We can walk you through the credits you may be eligible for during your tax prep appointment and answer any questions you have. Call 860-216-2195 to schedule your appointment.