The Earned Income Tax Credit (EITC) could help save your clients a lot in taxes and increase their refund. Like the Child Tax Credit, the EITC has undergone some changes under recent stimulus bills. To help you stay informed and better serve your clients, here are the basics of the EITC and everything you should know about its recent updates.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is a tax credit designed to help low to moderate income taxpayers. For your clients who qualify, it provides a significant tax break that can offset taxes owed or increase the amount of their refund.
Which of my clients will qualify for the EITC?
Eligibility for the EITC is determined by several factors, like the amount of money earned in a given year and the number of qualifying children. Income thresholds are updated each year. For tax year 2021, income thresholds are as follows:
|Number of qualifying children||Maximum Adjusted Gross Income (Single, Head of Household or Widowed)||Maximum Adjusted Gross Income (Married Filing Jointly)||Maximum earned credit|
Additionally, your clients must meet these criteria to qualify:
- Have earned income during the year
- Have earned no more than $10,000 in investment income for tax year 2021
- Have a valid social security number by the tax filing due date
- Be a U.S. citizen or resident alien the entire year
- Cannot file Form 2555 or Form 2555-EZ (foreign income)
For tax year 2021, your client can claim the credit if their filing status if married filing separately. They must file an individual return and their child must live with them for more than half the year.
If a client does not have any qualifying children, they must also meet the following criteria:
- Be at least 24 years of age if they were a student for more than half the year, 18 if they were in foster care, or at least 19 years old. There is no maximum age limit
- Cannot be a dependent or qualifying child on another person’s tax return
- Have lived in the United States for at least half the year
How have COVID and recent stimulus bills impacted the EITC?
Under the Tax Relief Act of 2020, if your clients’ 2019 income was greater than their 2020 income, they can use their 2019 income to calculate their EITC for their 2021 tax return. This is beneficial for those who didn’t earn income in 2020 and therefore would not qualify for the EITC. However, in most other cases, using the lower income amount would be more helpful as this usually provides a larger EITC. To help ensure the maximum credit for your clients, you can use the IRS calculator to see which amount would be the most beneficial.
The American Rescue Plan introduced more changes to the EITC, some of which only apply to the 2021 tax year:
- The option to use 2019 income if it was higher than 2021 income remains
- The maximum credit amount for those with zero qualifying children increased to $1,502
- The minimum age to qualify is now 19, and there is no maximum age
The bill also introduced these permanent changes:
- A person who is married filing separately may qualify if they did not live with their spouse for at least 6 months out of the year or are legally separated
- If an individual or couple would otherwise be eligible for the EITC but their qualifying child(ren) don’t have Social Security numbers, they can now qualify for the EITC but only at amount available for those without qualifying children
- The cap on investment income has increased to $10,000
How to calculate EITC
The EITC is calculated using your clients Adjusted Gross Income (AGI), filing status, and number of dependents.
The easiest way to calculate your clients’ EITC is using your TaxSlayer Pro software, which automatically accounts for the EITC and lets you know if your clients qualify. The IRS also provides an earned income tax credit calculator to help taxpayers determine whether they qualify for the EITC.
Is the EITC refundable?
Yes, unlike tax deductions, tax credits like the EITC can be received as a refund if your clients don’t have any tax liability after filing.
How to claim the EITC for prior year returns
If a client would have qualified for an EITC in prior years but did not claim it, they can still receive the credit up to four years later. If they did not file a return that year, they’ll need to file a Form 1040 and Schedule EIC for the relevant year. If they did file but did not claim the credit, they’ll need to file an amended return.
The information in this article is up to date for tax year 2021 (taxes filed in 2022).