The Earned Income Credit is a benefit for those who are working and have low to moderate incomes. To be eligible, you must file an income tax return. Here is an overview of the rules surrounding this credit and the requirements for claiming it.
What is the earned income credit?
The labor income tax credit (EIC) is a tax credit available to taxpayers with low or modest income. The credit can be worth up to $ 6,557 for 2019 and up to $ 6,660 for 2020. A tax credit is preferable to a tax deduction in that the credit is a direct reduction in the amount of tax. of.
The EIC was put in place to offset the impact of social security taxes on low to moderate income taxpayers and to encourage them to work.
Am I eligible for the earned income credit?
To be eligible for the earned income credit:
- You must file as a single or married filing jointly. You cannot deposit as a married deposit separately.
- You must have earned income for employment or self-employment.
- You cannot earn more than a certain amount of investment income for the year. For 2019, this amount is $ 3,600, for 2020, the amount is $ 3,650.
- You cannot file a Form 2555 for foreign earned income or Form 2555-EZ for foreign income exclusion.
- Note that there are special rules for members of the clergy or the military, as well as for those with certain disabilities or who have children with certain disabilities.
For the 2020 tax year, the adjusted gross income limits to claim the credit are:
Source: Tax Service
The maximum credit amounts for 2020 are:
- $ 6,660 with three or more eligible children
- $ 5,920 with two eligible children
- $ 3,584 with an eligible child
- $ 538 without eligible children
For more information on 2019 Earned Income Credit Limits and related information, please see IRS Publication 596.
The rules for eligible children and the earned income credit are as follows:
- They must have a valid social security number.
- The relationship must be with a child, stepson, adopted child or grandchild if they are the children of one of these children.
- They can also be a brother, a half-brother, a half-brother or a descendant of one of them, such as a niece or a nephew.
- At the end of the filing year, the child must be younger than you (or your spouse in the case of joint filing) and be under 19 years of age. The age limit is 24 if he is a full-time student.
- If the child was definitely disabled at the end of the reporting year, there is no age limit.
- The child must live with you (or your spouse) in the United States for at least half of the year.
- Only one person can claim the child. These rules are complex and if this applies to your situation, be sure to consult the IRS rules for that situation.
How to claim the earned income credit
To claim the earned income credit, you must file a federal income tax return. You must file the EIC Schedule and include it with your federal return. This appendix asks for information about the eligible child if you are applying for one.
The steps to calculate your earned income credit for 2019 begin on page 38 of the instructions for Form 1040. You will need to go through the worksheets and then enter the result on the new short Form 1040.
Before you get started, the IRS suggests that you have the following information:
- Social security information / verification for all people claimed on return.
- The dates of birth of all the persons who will be entered on the declaration.
- Copies of your federal and state returns from the previous year.
- Returns for all types of income received such as 1099, W-2, social security, unemployment, investment income, self-employment income and other sources as applicable.
- All expense records such as mortgage interest, property taxes paid, as well as all records of your business expenses if you operate a business.
- All 1095 forms (A, B or C) on health insurance.
- Banking information to facilitate direct deposit of any tax refund.
- Information on any dependent child care expenses you may have incurred.
If the earned income credit has been denied in previous tax years, you can submit Form 8862 with that tax return asking the IRS to reconsider this. You can also claim the earned income credit on previous years’ returns if you haven’t filed them.
If you believe you qualify for the Earned Income Credit, it is your responsibility to gather your information and complete the worksheets. What have you got to lose?