What is the Earned Income Credit (EIC)?
The Earned Income Credit (EIC) is a refundable tax credit that helps some low-income U.S. taxpayers by reducing the amount of tax owed on a dollar-for-dollar basis. Taxpayers may be eligible for refunds if their tax credit exceeds their tax payable for the year. Legislation enacted in 2020 recognized that many taxpayers’ incomes that year were lower than their incomes in 2019 due to the economic crisis and lockdown; this law allows taxpayers to base the EIC claimed on their 2020 tax returns on their 2019 or 2020 income.
For 2021 tax returns, the law liberalizes some EIC rules and makes an increased EIC available to more taxpayers without children.
Key points to remember
- The Income Tax Credit (EIC) is a refundable tax credit used to supplement the wages of low-income workers and help offset the effect of Social Security taxes.
- The EIC is only available to taxpayers with low or moderate incomes, whether or not they have eligible dependents.
- To be eligible for the EIC, a taxpayer must have accumulated income during the tax year. However, investment income cannot have exceeded a certain level.
- The American Rescue Plan Act of 2021 revised a number of EIC rules for the 2021 tax year.
Understanding the Earned Income Credit (EIC)
The Working Income Tax Credit (EIC), also known as the Working Income Tax Credit (EITC), was designed as a “work premium scheme” to supplement the wages of low-income workers. and help offset the effect of social security taxes. It continues to be viewed as an anti-poverty tax benefit.
The EIC is only available to taxpayers with low or moderate incomes, whether or not they have eligible dependents. To claim the credit for 2020, an individual taxpayer (or if the taxpayer is married, the individual or his or her spouse) with no qualifying dependents must be between the ages of 25 and 64 and must live in the United States for more than half of tax year.
In general, for 2020, eligible dependents include dependent children under the age of 19; students under 24; or dependents with a disability. The credit percentage, income limit and credit amount vary depending on the taxpayer’s reporting status and the number of dependents. These factors also determine the range of income phase-out over which the credit decreases to zero. No credit is allowed above the cap for the phase-out range.
Since many taxpayers’ 2020 incomes were lower than their 2019 incomes due to the economic crisis, the EIC claimed on 2020 tax returns can be based on 2019 or 2020 income.
To be eligible for the EIC, a taxpayer must have income, but cannot have investment income above a specified level, set at $ 3,650 for 2020. Age, relationship and residency requirements also apply to eligible dependents. The credit reduces the amount of tax owed on a dollar-for-dollar basis. If the amount of the EIC is greater than the amount of tax owed by a taxpayer, the taxpayer may be eligible for a refund.
The EIC is one of the most important tax credits available to individual taxpayers. To be eligible for the EIC in 2020, the taxpayer must be a U.S. citizen or resident alien for the entire year and have a valid Social Security number on the due date of the tax return. The amount of credit that can be claimed on a tax return depends on the taxpayer’s annual earned income for the tax year, filing status, and the number of qualified dependents of the taxpayer.
Example of an earned income credit
A tax credit reduces the value of a taxpayer’s liability, dollar for dollar. For example, an individual who has a tax bill of $ 2,900 and can claim a credit of $ 529 will owe $ 2,900 – $ 529 = $ 2,371. This lower amount is the total that the taxpayer must pay to the Internal Revenue Service (IRS) for the year. If a taxpayer has a total tax debt of $ 1,000 and a credit of $ 1,500, he should be entitled to a refund of $ 500.
Eligibility for the earned income credit
To be eligible for the EIC, a taxpayer’s earned income and adjusted gross income (AGI) must be below certain income limits. For the 2020 tax year, the limits on income level, credit amount and investment income for a single or married taxpayer vary depending on the number of eligible dependents in the household and are shown in the table. below :
|Qualifications for the Earned Income Credit in 2020|
|Children or parents claimed||Maximum AGI (single, head of family or widower)||Maximum AGI (joint filing)|
|0||$ 15,280||$ 21,710|
|1||$ 41,756||$ 47,646|
|2||$ 47,440||$ 53,330|
|3||$ 50,594||$ 56,844|
As the table above shows, a single tax filer with no dependents earning less than $ 15,280 in 2020 is eligible for an earned income tax credit of up to $ 538. On the other hand, a married taxpayer and his or her joint filing spouse, with two children who are eligible dependents, can claim up to a maximum of $ 5,920 in CIE if the total income earned by the couple in 2020 is less than $ 53,330.
The limits of the EIC are:
- No eligible child: $ 538
- 1 eligible child: $ 3,584
- 2 eligible children: $ 5,920
- 3 or more eligible children: $ 6,660
Additionally, the IRS states that to be eligible for the EITC in the 2020 tax year, investment income must not exceed $ 3,650.
A taxpayer who is married and who produces separately is generally not entitled to this credit. The tax law provides special EIC rules for clergy and members of the military stationed overseas, as well as specific rules coordinating credit with tax laws applicable in Puerto Rico, Guam, and American Samoa.
Changes to the earned income credit for 2021 tax returns
The American Rescue Plan Act of 2021 revised a number of EIC rules for the 2021 tax year and, in particular, increased the amount and eligibility rules for the EIC for taxpayers with no dependents. eligible.
While annual inflation adjustments are expected to increase the 2021 income caps, phase-out ranges and credit limits for all eligible taxpayers, credit and phase-out rates for taxpayers with no one to pay. eligible charge will drop from 7.65% to 15.3%; the maximum earned income amount for the credit and the phase-out amount will increase to $ 9,820 and $ 11,610, respectively. Also in 2021, the law reduced the age threshold for taxpayers without eligible dependents to 19 years and increased the investment income limit from $ 3,650 to $ 10,000.
New rules more in line with current family law practice will allow the CIE to file separate returns if the requirements for legal agreements and living conditions are met. In addition, like the special economic crisis relief rule for 2020 returns, returns filed for the 2021 tax year will be able to base the credit on the taxpayer’s income for 2019 or 2021.