What Is the Earned Income Tax Credit score rating (EITC)?
The earned income tax credit score rating (EITC) is a refundable tax credit score rating this is serving to positive U.S. taxpayers with low revenue by the use of reducing the volume of tax owed on a dollar-for-dollar basis. Taxpayers could also be eligible for refunds if their tax credit score rating exceeds their tax felony duty for the 12 months.
Legislation enacted in 2020 recognized that many taxpayers’ incomes that 12 months had been lower than their incomes in 2019 on account of the COVID-19 monetary crisis and lockdown; this regulation we could in taxpayers to base the EITC claimed on their 2020 tax returns on each their 2019 or 2020 revenue.
For 2021 tax returns, the regulation liberalizes some EITC rules and makes an greater EITC available to additional childless taxpayers.
Key Takeaways
- The earned income tax credit score rating (EITC) is a refundable tax credit score rating used to counterpoint the wages of low-income personnel and help offset the affect of Social Protection taxes.
- The EITC is available best to taxpayers with low or moderate revenue, whether or not or no longer or no longer they have qualifying dependents.
- To be eligible for the EITC, a taxpayer should have accrued revenue all over the tax 12 months. Then again, investment income can’t have surpassed a specified degree.
- The American Rescue Plan Act (ARPA) of 2021 revised fairly a couple of EITC rules for the 2021 tax 12 months.
Working out the Earned Income Tax Credit score rating (EITC)
The earned income tax credit score rating (EITC), often referred to as the earned income credit score rating (EIC), was once as soon as conceived as a “work bonus plan” to counterpoint the wages of low-income personnel and help offset the affect of Social Protection taxes. It’s nonetheless noticed as an anti-poverty tax receive advantages.
The EITC is available best to taxpayers with low or moderate revenue, whether or not or no longer or no longer they have qualifying dependents. To mention the credit score rating for 2021, an individual taxpayer (or if the taxpayer is married, the individual or their spouse, filing jointly) with no qualifying dependents should be no less than 19 years old-fashioned and should are living in the United States for more than a part of the tax 12 months.
Generally, for 2021, qualifying dependents include dependent children who are under age 19, students under age 24, or dependents with a disability. The credit score rating percentage, revenue cap, and credit score rating amount vary consistent with a taxpayer’s filing status and selection of dependents. The ones parts moreover unravel the income phaseout range over which the credit score rating diminishes to 0. No credit score rating is allowed above the ceiling for the phaseout range.
Because of many taxpayers’ 2021 incomes had been lower than their 2019 incomes on account of the industrial crisis, the EITC claimed on 2021 tax returns can be in accordance with 2019 revenue if those revenue are higher.
To be eligible for the EITC, a taxpayer should have revenue then again can’t have investment income in excess of a specified degree, set at $10,000 for 2021. Age, relationship, and residency prerequisites moreover observe with acknowledge to qualifying dependents. The credit score rating reduces the volume of tax owed on a dollar-for-dollar basis. If the volume of the EITC is greater than the volume of tax owed by the use of a taxpayer, then the taxpayer could also be eligible for a refund.
The EITC is without doubt one of the most crucial tax credit score available to specific individual taxpayers. To qualify for the EITC in 2021, the taxpayer should be a U.S. citizen or a resident alien for the entire 12 months and have a sound Social Protection amount by the use of the tax return’s due date. The amount of credit score rating that can be claimed on a tax return will depend on the taxpayer’s annual earned income for the tax 12 months, filing status, and selection of qualified dependents.
Example of the EITC
A refundable tax credit score rating reduces the price of a taxpayer’s felony duty, buck for buck, and leads to a refund if the felony duty is reduced beneath 0. As an example, an individual who has a tax bill of $2,900 and can claim a $529 credit score rating will owe $2,371 ($2,900 – $529 = $2,371). That lower amount is the whole that the taxpayer should pay to the Within Source of revenue Supplier (IRS) for the 12 months. If a taxpayer has a whole tax felony duty of $1,000 and a credit score rating of $1,500, then the taxpayer should be entitled to a refund of $500.
Qualifying for the EITC
To qualify for the EITC, a taxpayer’s earned income and altered gross income (AGI) should be beneath positive income limits. For the 2021 tax 12 months, the bounds on the income degree, credit score rating amount, and investment income for a single or married taxpayer vary, depending on the selection of qualifying dependents throughout the circle of relatives, and are confirmed throughout the table beneath:
| 2021 Earned Income Tax Credit score rating {{Qualifications}} | |||
|---|---|---|---|
| Children or Members of the family Claimed | Maximum adjusted gross income (AGI) (Single, Head of Circle of relatives, Widowed, or Married Filing One by one*) | Maximum AGI (Married Filing Jointly) | EITC Restrict |
| 0 | $21,430 | $27,380 | $1,502 |
| 1 | $42,158 | $48,108 | $3,618 |
| 2 | $47,915 | $53,865 | $5,980 |
| 3 | $51,464 | $57,414 | $6,728 |
*Taxpayers who claim the EITC under married filing one at a time should meet the eligibility prerequisites under the specific rule throughout the American Rescue Plan Act (ARPA) of 2021.
As confirmed throughout the table above, a single filer with no dependents who is earning not up to $21,430 in 2021 is eligible for an EITC of up to $1,502, depending on AGI. On the other hand, a married taxpayer and spouse filing jointly, having two children who are qualifying dependents, can claim up to a maximum EITC of $6,728 if the whole of the couple’s earned income in 2021 is not up to $53,865.
Additionally, the IRS stipulates that to qualify for the EITC in tax 12 months 2021, investment income should no longer exceed $10,000.
Beginning in 2021, taxpayers who are married filing one at a time can qualify for this credit score rating provided that they meet the eligibility prerequisites under the ARPA. The tax regulation provides specific EITC rules for clergy and members of the military stationed out of the country, and particular rules coordinating the credit score rating with the tax rules applicable in Puerto Rico, Guam, and American Samoa.
Changes throughout the EITC for 2021 Tax Returns
As well-known above, the ARPA revised fairly a couple of EITC rules for the 2021 tax 12 months and, in particular, greater the volume of—and eligibility rules for—the EITC for taxpayers with no qualifying dependents.
As offered, 2021 income ceilings greater on account of inflation, together with phaseout ranges and credit score rating limits, for all eligible taxpayers. Credit score rating and phaseout fees for taxpayers with no qualifying dependents greater from 7.65% to 15.3%; the maximum earned income amount for the credit score rating and the phaseout amount rose to $9,820 and $11,610, respectively. Moreover in 2021, the regulation reduced the age threshold for taxpayers with no qualifying dependents to 19 and bigger the ceiling on investment income from $3,650 to $10,000.
New rules additional in line with supply family regulation follow allow the EITC on one at a time filed returns if prerequisites concerning legal agreements and living arrangements are met. In addition to, in a similar way to the specific monetary crisis support rule for 2020 returns, returns filed for the 2021 tax 12 months are allowed to base the credit score rating on the taxpayer’s income for 2019 or 2021.
What Is the Difference Between a Tax Credit score rating and a Tax Deduction?
A tax credit score rating lowers the volume of tax you owe on a dollar-by-dollar basis. As an example, a $1,000 tax credit score rating means that you owe $1,000 a lot much less in taxes. In contrast, a tax deduction lowers your taxable income. If your taxable income drops by the use of $1,000 and also you may well be throughout the 24% tax bracket, you might save $240 in taxes.
How So much Income Can You Earn in Investments and However Take the EITC?
For 2021 taxes, the maximum investment income you’ll be able to earn rose from $3,650 to $10,000.
