Today is National Earned Income Tax Credit Awareness Day! The Earned Income Tax Credit (EITC) is the country’s largest program for working people with low to moderate income. According to the IRS, about 25 million eligible filers received the EITC last year, and the average EITC was approximately $2,461. However, millions of taxpayers are still missing out on this valuable tax credit; the IRS reports that one out of five qualifying filers fails to claim the tax credit.
You may wonder why someone would miss a tax credit worth up to $6,660 in 2020 or $6,728 in 2021 for a family with three or more children? Well, many people who qualify for the credit miss out on it because they are newly qualified or choose to not file a tax return because their income falls below the IRS income filing limit (For tax year 2020 $12,400 single, $24,800 married filing jointly and for tax year 2021 $12,550 single and $25,100 married filing jointly).
As a result of events that occurred in 2020, you may have experienced lower income and may be newly qualified for EITC when you may not have been eligible before, but in order to get the credit, you have to make sure you file your federal taxes this year.
Want to know more about the EITC? Here are answers to important questions about the tax credit, and information on how you can qualify.
What exactly is the Earned Income Tax Credit?
The EITC is a refundable tax credit given to taxpayers that earn low to moderate income from a job or from being self-employed. While it may eliminate the taxes you owe, you may also receive a tax refund for the amount of your credit if the credit is more than the amount of taxes you owe.
Who is eligible to claim the Earned Income Tax Credit?
Generally speaking, you may be eligible for the EITC if you meet the income limits included below and all of the following apply:
- You are a U.S. citizen
- You are over the age of 25 or have qualifying children
- You do not file “married filing separately”
- You have earned income from employment. Unemployment income doesn’t count.
- You can qualify if you have income from a home business or provide services
While you can have interest, dividends and other investment earnings, your investment income must be less than $3,650 in 2020. But most importantly, you have to file your federal taxes in order to claim this valuable credit.
Starting in tax year 2021 (the taxes you file in 2022), under the American Rescue Plan, the Federal Earned Income Tax Credit (EITC) has been expanded for workers without kids and nearly triples the maximum credit. Eligibility is also extended for a wider range of tax filers, including those who are over 65 or between the ages of 19–25.
What are the income limits?
The limits are adjusted each year, and for tax year 2020, your earned income and adjusted gross income must be less than:
- $50,594 ($56,844 married filing jointly) with three or more qualifying children
- $47,440 ($53,330 married filing jointly) with two qualifying children
- $41,756 ($47,646 married filing jointly) with one qualifying child
- $15,820 ($21,710 married filing jointly) with no qualifying children
For tax year 2021, your earned income and adjusted gross income must be less than:
- $51,464 ($57,414 married filing jointly) with three or more qualifying children
- $47,915 ($53,865 married filing jointly) with two qualifying children
- $42,158 ($48,108 married filing jointly) with one qualifying child
- $15,980 ($21,920 married filing jointly) with no qualifying children
What is the amount of credit?
Your income and number of qualifying children will determine the actual amount of your credit. For tax year 2020 the maximum credits are as follows:
- $6,660 with three or more qualifying children
- $5,920 with two qualifying children
- $3,584 with one qualifying child
- $538 with no qualifying children
For tax year 2021 the maximum credits are as follows:
- $6,728 with three or more qualifying children
- $5,980 with two qualifying children
- $3,618 with one qualifying child
- $543 with no qualifying children
What is a qualifying child?
A child qualifies if he/she meets four tests for age, relationship, residency, and joint return as follows:
- Age: Generally, your child must be under 19, under 24 if they are a full-time student, or any age if permanently and totally disabled.
- Relationship: Your child must be either your son, daughter, foster child, or stepchild (including all of their respective children). Your “qualifying child” can also be your brother, sister, half brother or sister, or step-sister or brother (including all of their respective children).
- Residency: Your child must have lived with you in the U.S. for more than half the year.
- Joint Return: Your child must not have filed a joint return. If they did file a joint return, it should have been because they were filing for a tax refund, not because they were actually required to file.
What if I had lower income in 2020 due to unemployment or reduced income?
Under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 there is a very important provision which has the potential to help workers who experienced lower income in 2020, or received unemployment income in lieu of their regular wages, to get bigger tax credits and larger refunds in the coming year.
The special lookback rule will allow lower income individuals to use their earned income from 2019 to determine their Earned Income Tax Credit in 2020, since their lower 2020 income could reduce the amount they are eligible for.
When can I expect to receive my refund if it includes EITC or Additional Child Tax Credit?
Under the Protecting Americans from Tax Hikes (PATH) Act, signed into law in December 2015, the IRS cannot issue refunds that include Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) before mid-February.
The PATH Act, which applies to all tax preparation methods, is intended to help detect and prevent tax fraud. The extended refund release also gives the IRS more time to ensure taxpayers are properly claiming the credits, so they get the refund they are owed.
The IRS will begin accepting and processing tax returns when they open for the season on February 12, 2021, and anticipate a first week of March refund for many EITC and ACTC taxpayers if they e-file with direct deposit and there are no issues with their tax returns.
The IRS encourages you to file as soon as possible so you can get closer to your tax refund!
What if I haven’t filed my taxes for a couple of years and may be eligible for EITC for prior years?
If you haven’t filed your taxes for a few years, this is a good time to file your prior tax returns since you may be eligible for EITC in those prior years. If you are due a tax refund, you have three years from the filing deadline to file your tax return for a tax refund or to claim a credit like the Earned Income Tax Credit. So if you didn’t file your 2017 taxes, you would have until May 17, 2021 to file to claim EITC. The IRS reports close to one billion dollars in unclaimed tax refunds every year, and many taxpayers are surprised to find that some of this money belongs to them in the form of Earned Income Tax Credit when they file previous years’ returns. Prior-year returns have to be mailed in, but TurboTax has previous years tax products so you can file previous years’ taxes.
Don’t worry about knowing EITC tax rules when you file your taxes. TurboTax will ask you simple questions about you and will calculate the tax credit if you are eligible based on your answers. If you can claim Earned Income Tax Credit you may be able to file your taxes for free.