- The Working Income Tax Credit (EITC) can lower taxes and increase refunds for low- and moderate-income workers and families.
- The amount of credits ranges from $ 1,502 to $ 6,728 for 2021, depending on income, filing status and dependents.
- The EITC was established in 1975 to help low-income workers offset payroll taxes and rising food and fuel costs.
- The accuracy and clarity of this article has been reviewed by Lisa Niser, an expert on the Personal Finance Insider Tax Review Board.
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The Working Income Tax Credit, or EITC, is designed to provide tax relief to low- and moderate-income workers and families. The credits range from $ 1,502 to $ 6,728 for tax year 2021 and from $ 560 to $ 6,935 for 2022. The amount you receive depends on your income, your reporting status and the number of children you have. Eligible workers without children can also claim the earned income tax credit.
In general, the less you earn, the greater the earned income credit. Since this is a refundable tax credit, low-income taxpayers who have little or no tax payable can still receive the full amount of the credit as a tax refund.
It’s important to note that tax deductions and tax credits can both change the amount of tax you owe, but they work differently. Deductions reduce the amount of your total taxable income, while credits reduce the amount of tax you owe, and some, like the EITC, may reimburse you even though you owe no tax.
Who is eligible for the Federal EITC?
The EITC was created by the Tax Reduction Act of 1975 as a temporary way to help low-income workers offset Social Security payroll taxes and rising food and energy costs. It was considered “both as a program to fight poverty and as an alternative to social assistance because it encouraged people to work”. The Revenue Act of 1978 made the EITC permanent.
To benefit from the EITC, you will need:
- At least $ 1 of earned income from employment or self-employment
- Less than $ 10,000 in investment income for the tax year
- No foreign income for which you are claiming the exclusion of foreign earned income on Form 2555
- A valid social security number
- U.S. citizenship or resident alien status
- Filing status other than married separate filing, unless you meet the new requirements for married but separated spouses
- An eligible child who meets the age, relationship, residence and joint return conditions
- Or, with no qualifying child, must have lived in the United States for more than half of the year, not be declared a dependent by anyone else, and be between 25 and 65 at the end of the year. ‘taxation year
There are special eligibility rules for military and clergymen and workers with disability income or children with disabilities. To find out if you are eligible for credit, you can use the EITC wizard on the IRS website.
In addition to the basic requirements, your Adjusted Gross Income (AGI) must be below the income thresholds to be eligible. Here is an overview:
Income tax credit for 2021
If you have children, the income limits and maximum credits don’t change much for 2022. However, workers without children will have a harder time qualifying and they will receive a smaller credit if they do. Here’s what to expect:
Income tax credit for 2022
If you haven’t claimed the earned income tax credit for previous years and think you qualified, there may still be time. You can file an amended tax return to receive the credit for any (or all) of the previous three tax years for which you should have received the credit.
How Did the American Rescue Plan Act Affect the EITC?
The American Rescue Plan Act (ARPA) of 2021 “extended the impact of the EITC in several ways, with some rules impacting only 2021 and others impacting both 2021 and future years.” said Steve Wittenberg, director of wealth planning at technology and investment firm SEI.
A temporary change applies to workers without children. “ARPA has introduced special rules for 2021 to make it easier for people without children to apply for credit,” said Sallie Mullins Thompson, chartered financial planner and chartered accountant at her self-proclaimed tax and accountant firm in New York City. . The ARPA roughly triples the maximum credit for childless workers from $ 538 to $ 1,502 for 2021. By default, the change also increases state EITCs calculated as a percentage of federal credit.
Meanwhile, the qualifying investment limit has increased from $ 3,650 in 2020 to $ 10,000 for 2021 and beyond.
The ARPA has also adjusted the requirements for married but separated spouses, “who can now apply for the EITC if they do not file joint returns, they live with the eligible child for more than half of the year,” and either they are legally separated under state law or they do not have the same primary residence as the other spouse for at least the last six months of the year, ”says Wittenberg.
The financial report
The Working Income Tax Credit can provide substantial tax relief to low-income workers and families. If you follow the income and filing guidelines, be sure to claim the credit on your return when you file your taxes, but keep in mind that you won’t get your refund right away. By law, the Internal Revenue Service must wait until March to reimburse taxpayers who claim the EITC.
“Due to years of fraudulent deposits for this credit, the IRS has implemented more restricted processing procedures, thus delaying refunds for certain situations until further investigation can be conducted,” he said. said Mullins Thompson.
Finally, you can use your income from 2019 or 2021 to calculate your EITC for 2021. Make sure to use the numbers back and forth and “use the year of income that gives the highest credit amount,” says -she.