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5 Facts About the Earned Income Tax Credit

Updated for Tax Year 2021 / October 16, 2021 08:04 AM


OVERVIEW

Many qualified taxpayers overlook the Earned Income Tax Credit (EITC), potentially missing out on thousands of dollars at tax time. Here are 5 facts every taxpayer should know about the EITC.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

earned income tax credit
For many Americans, it can be difficult to know which tax credits they qualify for and why. But tax credits are worth having because they provide meaningful savings on a filer’s overall tax contribution and, in some cases, lead to an increased tax refund.

One of the most beneficial and refundable tax credits for families with low or moderate incomes is the Earned Income Tax Credit (EITC).

The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC). For 2021, you can use either your 2019 or 2021 income based on whichever one provides the highest credit amount.

Here are five facts about the EITC all taxpayers should know.

1. Eligibility is limited to low-to-moderate income earners

The 2021 general eligibility rules for the EITC are:

  • Taxpayers must file as individuals or married filing jointly.
  • If married, you, your spouse and your qualifying children must have valid Social Security numbers.
  • You must also be at least 19 or older with no upper age limit. However, if you are at least a part-time student then you must be at least 24 years old. Qualifying former foster children and homeless youth must be at least 18 years old.

Although the EITC typically is considered a credit for low-income filers, there are many variations of income, filing status and number of qualifying dependents that affect eligibility. For example:

  • In 2021, a married couple with three children and adjusted gross income of $57,414 or less could receive up to $6,728.
  • An qualifying individual that has no children may receive up to $1,502.

It's recommended that all filers explore their eligibility for receiving the EITC each year.  According to the Internal Revenue Service, the average amount credited in 2018 was $2,488.

2. Self-employed still counts

Many filers, especially self-employed individuals, fail to take advantage of credits because they think they are ineligible.

The IRS considers all income that is earned eligible for the credit. That includes:

  • Wages
  • Salaries
  • Tips
  • Union strike benefits
  • Long-term disability benefits received prior to minimum retirement age
  • Net earnings from self-employment
  • Gross income received as a statutory employee (an independent contractor under common law rules)

Types of income that do not qualify as earned income for the credit include:

  • Child support
  • Retirement income
  • Social Security benefits
  • Unemployment benefits
  • Alimony
  • Pay received for work while in prison

3. Investment income can disqualify you

In 2021, income derived from investments disqualifies you if it is greater than $10,000 in the year.

4. Eligibility fluctuates

Taxpayers should pay attention to their EITC eligibility every filing year as tax laws and personal tax situations can change. Changes that could affect your eligibility for the EITC can include

  • a new job,
  • unemployment,
  • loss of an annual bonus,
  • a change in marital status, or
  • a change in a spouse's employment situation.

5. Tax software can help

Electronic tax programs offer an advantage over traditional pen and paper tax preparation because, as long as you enter your information accurately, they ensure that you receive the tax benefits you deserve.

Because the EITC is one of the most lucrative credits available to struggling Americans, filers should consider using a qualified tax software system like TurboTax to maximize the earned income credit.

Losing the EITC

Like everything else associated with the IRS, it doesn't pay to be dishonest. The IRS may reduce or even revoke a filer's access to the Earned Income Tax Credit for a number of years if the agency determines the filer committed fraud or flouted the rules to obtain the credit.

  • If the IRS finds that someone recklessly disregarded the rules to increase the credit, it may prohibit the filer from receiving the credit for two years, after which the filer would have to file a special request form to apply for the right to claim the credit.
  • In the event the IRS determines a filer has supplied fraudulent financial information to claim the EITC, it may penalize the filer by disallowing the credit for 10 years.

These penalties do not apply to math or clerical errors.

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