Tax credits are like “found money” that turns up when you fill out your tax form. Unlike deductions, credits are awarded dollar for dollar. In other words, if you are eligible for a $300 tax credit, you get $300 off your tax bill—kind of like a sale at the grocery store. One particular tax credit is available for low- to moderate-income individuals and families who need the tax break the most.
How Does a Tax Credit Work?
A tax credit works like any credit - it reduces the amount of taxes you owe. A tax credit can even result in a tax refund.
Here is an example of how a tax credit works:
Say you have a tax bill of $3,000. If you can claim a $500 credit, that amount comes directly off the $3,000, lowering your tax bill to $2,500.
$3,000 - $500 = $2,500
A tax credit does not, however, affect your gross income or adjusted gross income. The credit is strictly applied to your tax bill once it is calculated.
What Is the EITC?
The Earned Income Tax Credit was passed to keep families out of poverty while also encouraging people to find and maintain work.
The EITC is available for eligible low- to moderate-income individuals. You must have earned income and meet the requirements without a child who qualifies. Those without a Social Security Number and those who are a qualifying child of another person are not eligible.
If you file married, filing separately, or don't file a tax return at all, you do not qualify. Finally, you cannot file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Income Credit. If you do, you will be ineligible for the credit.
If you are in the military or the clergy or have disability income or children with disabilities, there are special rules for the EITC in these cases, which we go into below.
EITC Benefits for 2021
For the 2021 tax year, the one we are entering now, the EITC ranges from $543 to $6,728 depending on your filing status and the number of children you can claim. Keep this in mind for when you file your taxes in the Spring of 2022.
If you were eligible in the three previous tax years for this credit but did not claim it, the IRS says to let it know so you can receive the money for those credits as well. For 2020, the EITC was $538 to $6,660. If you have not yet filed your 2020 taxes and you qualify, be sure to claim it on April 15 this year.
Here are the maximum credit limits for 2021 regardless of filing status:
- With no qualifying children, the max credit is $543.
- With one qualifying child, the max credit is $3,618.
- With two qualifying children, the max credit is $5,980.
- With three or more qualifying children, the max credit is $6,728.
There are income limits on qualifying for the EITC.
Who Qualifies for the EITC?
Single persons without children can claim the EITC, but they must be at least 25 years old and less than 65 years old at the end of the tax year if they do not have a qualifying child. The person must have lived in the US for more than six months and not be qualified as a dependent child on another's tax return.
During the tax year in question, you must have a total earned income from your job or self-employment of at least $1.00. Any investment income must be $3,650 or less for the year.
If you meet the income requirements, you can then claim qualified children if you have them (if not, you are still eligible for a credit, just a smaller one). Each qualifying child up to three increases the amount of the EITC.
A qualifying child is:
- Your son, daughter, adopted child, stepchild, foster child, or grandchild.
- Your brother, sister, half-brother, or half-sister.
- Your stepbrother, stepsister, or any of their children (meaning your niece or nephew).
- Under the age of 19 at the end of the tax year and younger than you or your spouse when filing jointly, or under 24 if a full-time student.
- Any age if the child is totally and permanently disabled.
- Living with you or your spouse in the US for more than six months of the tax year.
Each child must have a Social Security Number, and you must supply the birth date.
You must file as single, head of household, or widowed, or married filing jointly. The credit parameters are based on your adjusted gross income. Your AGI is your total income subject to tax minus specific deductions.
Filing single, head of household, or widowed without qualifying children, your 2021 adjusted gross income maximum for the credit is $15,980. To see the limits for 2020, look here. The amounts are slightly lower.
- With one qualifying child, your max AGI is $42,158.
- With two qualifying children, your max AGI is $47,915.
- With three or more qualifying children, your max AGI is $51,464.
If you file married, filing jointly, and have no qualifying children, your max AGI is $21.920.
- With one qualifying child, your max AGI is $48,108.
- With two qualifying children, your max AGI is $53,865.
- With three or more qualifying children, your max AGI is $57,414.
Like so much else in 2020, changes have been made to account for COVID-19.
Special Rules Due to Coronavirus
Because of the potential for lost jobs and income in 2020 due to COVID-19, the IRS allows you to use either your 2019 or your 2020 income to calculate your EITC for your 2020 taxes. You can use whichever income amount provides the larger credit. If you qualify for the Child Tax Credit, this change applies to that, too.
How to Claim the EITC
To claim the EITC on your 2021 taxes (or your 2020 taxes if you have yet to file them), file Form 1040, US Individual Tax Return, or Form 1040 SR, US Tax Return for Seniors. If you have one or more qualifying children, also file Schedule EIC for Form 1040 or 1040 SR.
If you wish to apply for your EITC for any of the three previous tax years, follow these instructions for claiming the EITC for prior years
The Earned Income Tax Credit is a boon to lower-income individuals and families struggling to pay the bills. Whatever your final tax bill, the EITC lowers it. What’s not to like about a lower tax bill? You might even get a refund if the credit is more than the taxes withheld.
The EITC and other credits are available to eligible taxpayers. Remember to look for them as you prepare your taxes. If you have questions, contact Top Tax Defenders so we can help you scope out the credits you deserve.