Earned Income Tax Credit (EITC): What It Is & How to Qualify

Earned Income Tax Credit (EITC)

In this article, you will get to know what EITC is and how you can qualify for it. We would also tell you how EITC works and what the income limit is for the EIC.

What is the Earned Income Tax Credit (EITC)?

The earned income tax credit (known commonly as EITC or EIC) is a refundable tax credit designed to benefit low and moderate-income workers. For the 2021 tax year, the range for EIC is fixed from $1,502 to $6,728. The EIC for a particular taxpayer depends on his income, number of children and tax-filing status. People without a child can also qualify.

If you satisfy the criteria to avail of the credit, you must claim it on your tax return. If you qualified for EIC but have not claimed it while filing taxes in the last 3 years, you should approach the IRS so as to get the money back.

Some of the rules associated with the EITC have been changed by the $1.9 trillion American Rescue Plan Act. We will discuss these changes in the sections below.

Some Important facts related to the Earned Income Tax Credit (EITC)

Here are some important facts you should know about the earned income tax credit:

  • For the tax year 2021 (for your tax return due to file in 2022), the range for EIC is fixed from $1,502 to $6,728. The EIC for a particular taxpayer depends on his income, number of children and tax-filing status.
  • Having a child is not mandatory to claim the earned income credit
  • If your income for 2019 is higher than that of the year 2021, you can use the 2019 income to calculate your EITC.
  • The EITC not only reduces the amount of tax you are liable to pay. It also entitles you to claim a refund. In some cases, a refund can be even more than the tax you owe.
  • The IRS cannot disburse your refund till mid-February if you have claimed the EITC

What is the Income limit to Qualify for the Earned Income Tax Credit (EITC)?

The following tables would show the maximum EITC amounts, along with the maximum you can get before losing the benefit-

A. EITC for 2021 

(For Taxes you should File in April 2022)

Number of Children

Maximum EITC

Maximum AGI (for single or head of household filers)

Maximum AGI for Married Joint Filers

0

$1,502

$21,430

$27,380

1

$3,618

$42,158

$48,108

2

$5,980

$47,915

$53,865

3 or more

$6,728

$51,464

$57,414

 

B. EITC for 2022 

(For Taxes you should File in April 2023)

Number of Children

Maximum EITC

Maximum AGI (for single or head of household filers)

Maximum AGI for Married Joint Filers

0

$560

$16,480

$22,610

1

$3,733

$43,492

$49,622

2

$6,164

$49,399

$55,529

3 or more

$6,935

$53,057

$59,187

Please note the following points-

  • Both your Adjusted Gross Income (AGI) and earned income need to be below the limits mentioned in the table.
  • Your earned income normally includes salary, tips, job wages and other taxable income you receive from your employer. Your AGI is equal to your earned income minus the applicable deductions.
  • Usually, the less you earn, the more will be your earned income credit.
  • For 2022: The credit available to people with no children has decreased significantly. This is due to the fact that the American Rescue Plan Act temporarily increased it from $543 to $1,502 in 2021. The same has not been carried forward to the 2022 tax year.

Who all are Qualified for the Earned Income Tax Credit (EITC)?

In addition to staying below the thresholds mentioned above, taxpayers need to meet certain other rules and requirements to claim the EITC. The following points will give you a fair idea of these-

  • You must be having a minimum of $1 as the earned income 
  • Pensioners and unemployed won’t qualify
  • Your investment income should not be over $10,000 
  • You must not have filed Form 2555-EZ, Foreign Earned Income Exclusion or Form 2555, Foreign Earned Income
  • For the tax year 2021, you can claim EITC if you are separated but still married. For this, you should not be filing a joint tax return and your child must be living with you for over 6 months during the year. Also, you must not have lived with your spouse during the last 6months or you must have executed a separation agreement /decree.
  • Special EIC qualification rules are in place for members of the military and the clergy, people with disability income or people having children with disabilities.

What are the Rules to Claim Kids as a Part of the EITC?

If you wish to include one or more children while claiming EITC, each of the children must meet the following criteria to qualify:

  • The child can be your daughter, son, grandchild, stepchild, adopted child or foster child. The child can also be your sister, brother, half-sister, half-brother, stepsister, stepbrother or your niece or nephew.
  • The child must be below 19 years of age at the end of the year. He/she must be younger than you /your spouse if you are filing jointly, or the child must be below 24 years if he/she is a full-time student. No age limit is specified for permanently and totally disabled kids.
  • The child must have lived with you /your spouse in the country for over 6 months during the year.
  • The child must have a Social Security Number (SSN). 
  • You must mention the exact name and SSN of the child as they appear on his/her Social Security card.
  • You must mention his/her correct date of birth.

What happens if you do not have Kids?

Even if you do not have kids, you may qualify to claim the EITC, provided you meet three additional criteria mentioned below:

  • You must have lived in the U.S. for over 6 months during the year.
  • No one is claiming you as a dependent /qualifying child in his/her income tax return.
  • For the tax year 2021 (for your tax return due to file in 2022), you must meet the age criteria mentioned below-
    • You should be at least 24 if you have been a student for a minimum of five months during the year
    • You should be at least 18 if you were homeless in any taxable year or were in foster care any time after turning 14
    • You should not be below 19, otherwise.

What are the Consequences if you Make any EIC-Related Error?

If you make any error related to your EIC claim, the same may delay your refund by several months. It may also happen that the IRS can deny the entire EIC that may be due to you. If the IRS denies the entire EIC claim:

  • You must return any EIC amount received in error, in addition to the interest applicable
  • You might file Form 8862 before you are eligible to claim the EIC again.
  • You can be banned from claiming EITC during the next 2 years if the IRS observes you filed your tax return with “reckless /intentional disregard of the rules.”
  • You can be banned from claiming EITC for the next ten years if the IRS observes you filed the return fraudulently.

Hope from the above discussion, you have got a fair idea of EITC and the process to claim it. Different tax software available these days has simplified the process with a series of interview questions. If you qualify for the EITC, you may be able to get free tax software. But please note that even if your return is prepared by a tax software or a professional tax preparer, the IRS would hold only you responsible, for all the information you furnish along with your return.

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