Prices are rising at the quickest rate many Americans have ever seen, highlighting the importance of one of the most popular tax incentives for lower-income workers: the earned income tax credit.
However, while millions of people are qualified for the earned income credit, this particular tax benefit is one of the most difficult to understand. In a March appearance before Congress, IRS Commissioner Chuck Rettig stated that the credit has a 25% mistake rate.
Here’s how the earned income credit works, including what it is, who qualifies, and how to claim it to avoid leaving money on the table when you file.
What is the EITC (Earned Income Tax Credit)?
The earned income tax credit is one of the country’s greatest refundable tax credits for low-wage workers. According to the Internal Revenue Service, workers do not have to owe taxes to obtain the credit, and many individuals receive more money through the credit than they pay in federal income tax (IRS). All of this means that the credit can either reduce the overall amount of taxes owed by individuals or provide them with money in the form of a refund.
Originally established in 1975 during the Ford administration, the credit was viewed as a key work incentive for some of the country’s lowest earners, allowing them to recover some of the money they paid in Social Security payroll taxes throughout the year — and offsetting the disproportionate burden they faced as a result of the era’s record inflation.
The overall credit amount that each worker is qualified for is determined by his or her annual income, number of children, and filing status. The highest credit workers can claim for taxes submitted in 2022 ranges from $1,502 to $6,728.
However, even if you do not have a child, you may be eligible for the credit. Meanwhile, because to new pandemic-era increases from President Joe Biden’s American Rescue Plan, so-called “childless” workers can receive a credit nearly three times greater than it used to be (from $538 in 2020 to $1,502 in 2021). Unless expanded in a new legislative package, workers who do not have children will receive a maximum credit of $560 for 2022 tax returns (or the 2023 tax season).
Who is eligible for the Earned Income Tax Credit (EITC)?
The earned income tax credit has a fitting name: The most crucial condition for eligibility is to have some type of earned income. Most of the time, this implies that taxpayers had to be working. The actual amount is determined by the number of children you have and your filing status. According to the IRS, in 2021, single, head of household, and married filers with one child must have earned at least $10,400 to be eligible for the full credit.
According to the IRS, those profits can come from wages, salaries, tips, or other kinds of pay where federal income taxes are withheld. It can also be money earned through a side hustle, self-employment, pre-retirement disability compensation, or nontaxable combat pay.
Earned income, on the other hand, does not include interest or dividend payments, as well as money received from a pension, annuity, unemployment insurance (UI), alimony, or child support, according to the agency.
Taxpayers must additionally meet the following requirements in order to be eligible:
- Have a valid Social Security number by the deadline for filing their 2021 tax return;
- Have $10,000 or less in investment income in the 2021 tax year (up from $3,650 in the previous year);
- Not submitting a Form 2555 to record foreign earned income; and
- For the whole year, you must be a U.S. citizen or a resident alien.
- If you want to claim the credit for a child, the youngster must be under the age of 18. (or 24, if the child is a full-time student)
If you do not have children, your eligibility conditions are slightly different from those of the rest of the taxpayers, with the IRS demanding that you:
- Spend more than half of the tax year in the United States;
- Not be claimed as a qualifying child on the tax return of another person; and
- You must be at least 18 years old by the end of the year if you were previously homeless or in foster care; at least 24 years old if you were a full-time student throughout the tax year; or at least 19 in all other cases.
Taxpayers’ eligibility for the credit is also determined by their adjusted gross income (AGI) in many tax years – the current, previous, and upcoming ones. Taxpayers can use their 2019 earned income if it is greater than their 2021 earnings, thanks to a change to the American Rescue Plan. According to the IRS, this could result in a greater credit.
Cutoffs happen swiftly, emphasising the nature of the loans offered to the country’s lowest earners. To qualify for the full credit, single and head of household filers must earn no more than $19,300, while married couples must earn no more than $25,220. However, as long as single or head of household taxpayers earn no more than $50,954, they are eligible for at least a partial credit, as are married filers earning no more than $56,844.
Workers without children can claim a maximum credit of $1,502 in 2021, up from $538 in 2020. Employees with one or more qualifying children are eligible for increased credits.
The Earned Income Tax Credit: How to Claim It
To be eligible for the EITC, US workers must file a tax return – even if they are not compelled to do so under regular circumstances. For 2021, the so-called “standard deduction” income ceiling is $12,550 for individuals and married couples filing separately, $18,800 for heads of households, and $25,100 for married couples filing jointly.
Additionally, taxpayers in the United States who claim the credit have some control over the filing status they pick. Married but separated filers who have a qualified child and do not live with their spouse for at least half of the year may claim the credit without filing a joint return with their spouse. Additionally, they must be recognised legally separated in the state in which they reside.
Beginning in 2021, employees in the United States who have children without social security numbers are now eligible for the “childless worker” credit. Prior to this change, those taxpayers were not eligible for the credit.
If you’re unsure whether you qualify, you can use the IRS’ qualification assistant tool to determine your eligibility.
According to the IRS, taxpayers who qualify for the credit would not receive their refund until at least mid-February of the next tax year. To prevent fraud and errors, the agency is prohibited by law from disbursing those monies — as well as other family tax benefits, such as the child tax credit — any sooner.
Following that, you can receive your refund within 21 days if you file your taxes electronically and give the IRS with your direct deposit information.
Taxpayers may also claim an earned income credit at the state level, since 28 states and the District of Columbia, according to the Urban Institute, offer their own state EITC. Missouri, Utah, and Washington will also be added to the list by 2023.
The majority of state credits are based on the proportion of federal earned income credit money you receive, but check with your state’s specific requirements.
Nonetheless, changes to the system are possible. Even Rettig, the IRS’s chief, believes they are required. Rettig spoke before Congress in March about the importance of eventually simplifying the family tax credit system.
“We encourage everybody who may be qualified for this beneficial credit to review the requirements,” Rettig stated in January. “Each year, a large number of people neglect this and lose money.”