What is the Earned Income Tax Credit?
This post is about the Earned Income Tax Credit (EITC). See who qualifies for EITC and how to claim the tax credit. Also, see the 2021 tax credit table and use it to calculate how much you are likely to receive on your tax returns.
Also, we cover other frequently asked questions, including the rules around claiming children on your tax returns to get Earned Income Tax Credit.
Table of Contents:
- What is the Earned Income Tax Credit?
- Who is Eligible for the Earned Income Tax Credit?
- How do I claim my Earned Income Tax Credit?
- EITC Income Limits for 2021 Tax Year
- How the Earned Income Tax Credit Works
- History of the EITC
- Quick Facts about EITC
- What are the Rules for Claiming a Child for EITC?
What is the Earned Income Tax Credit?
The federal Earned Income Tax Credit (EITC) helps low- to moderate-income workers and families get a tax break.
If you qualify for the EITC, you can use the tax credit to reduce the taxes you owe – and maybe increase your refund.
The tax break is based on wages, salaries, tips, and other pay, as well as earnings from self-employment.
Therefore, to be eligible, you have to be earning some form of income either from a job or from self-employment.
Who is Eligible for the Earned Income Tax Credit?
According to the IRS, Low- to moderate-income workers with qualifying children may be eligible to claim the Earned Income Tax Credit (EITC) if certain if they meet certain qualification requirements (see below).
Additionally, you may qualify for the EITC even if you can’t claim children on your tax return.
To find out if you qualify for the EITC without a qualifying child, click here.
EITC Eligibility Requirements
To qualify for the EITC for the 2021 tax year, you must:
Have worked and earned income under $57,414
- Be a U.S. citizen or a resident alien all year
- Have investment income below $10,000 in the tax year 2021
- Have a valid Social Security number by the due date of your 2021 return (including extensions)
- Not file Form 2555 (related to foreign earned income)
Additionally, there are special eligibility rules for:
- Military members
- Clergy members
- Taxpayers and their relatives with disabilities
EITC Filing Status for 2021 Tax Year
In 2021, to qualify for the EITC, you can use one of the following statuses:
- Married filing jointly
- Head of household
- Qualifying widow or widower
- Married filing separate
What is Considered Earned Income for EITC?
Earned income for the EITC is defined as wages, tips, and other compensation included in gross income.
It also includes net self-employment income (self-employment income after deduction of one-half of Social Security payroll taxes paid by a self-employed individual).
In addition, those who provide care for disabled individuals and receive certain nontaxable payments under a Medicaid waiver may treat those payments as earned income for the purposes of the EITC.
Furthermore, servicemembers may elect to include combat pay in their earned income when calculating the EITC.
What income is Excluded from EITC?
Certain forms of income are not considered earned income for the purpose of the EITC.
These include pension and annuity income, the income of nonresident aliens not from a U.S. business, income earned while incarcerated for work in a prison, and TANF benefits paid in exchange for participation in work experience or community service activities.
Also, taxpayers who claim the foreign earned income exclusion – those that file Form 2555 or Form 2555EZ with their federal income tax return are ineligible to claim the EITC.
How do I claim my Earned Income Tax Credit?
To claim the EITC, a tax return with proper documentation must be filed with the Internal Revenue Service (IRS).
The amount of the credit changes every year and is based on earnings, the number of qualifying children, and marital status.
Also, a qualifying child is determined by age, the relationship to the filer, how long the filer and child have lived together in the U.S., and whether the child has filed a joint return.
Additionally, those without a qualifying child must be 25-65 years old at the end of the year, live in the United States for more than half the year, and cannot qualify as a dependent of another person.
Earned Income Tax Credit Table
As mentioned above, to qualify for the EITC for the 2021 tax year must meet the income limit requirements, in addition to the other eligibility rules.
Below are the EITC Income Limits for the 2021 Tax Year, otherwise known as the Earned Income Tax Table.
This applies to taxes due in April 2022.
|Federal EITC 2021 Income Limits|
|Number of Children||Maximum Credit||Maximum Earnings (AGI)|
|Three or More Children||$6,728||$51,464||$57,414|
How the Earned Income Tax Credit Works
A taxpayer’s income determines their eligibility for the EITC.
Eligibility for EITC also varies by family size and marital status.
Workers receive a credit equal to a percentage of their earnings, up to a maximum amount.
The credit increases with income up to a certain threshold. After that, it is flat and then phases out.
The maximum EITC and income thresholds are adjusted each year for inflation.
A temporary special rule in response to the COVID-19 pandemic allows taxpayers to use their 2019 earned income if it is greater than their 2020 earned income to determine their 2020 EITC.
The short video below from the IRS does a great job of explaining what the EITC is about.
History of the EITC
The federal EITC was first introduced in 1975. Since that time, the EITC has been improved to lift and keep more working families out of poverty.
The most recent change, which occurred under the American Recovery and Reinvestment Act (ARRA) happened in 2009.
The ARRA enhanced the credit for families with three or more children and for married couples.
While the 2009 EITC changes were meant to be temporary, they were made permanent in late 2015.
What is the Impact of the Earned Income Tax Credit?
The federal EITC returned nearly $67 billion in wages to 28 million working families and individuals in 2014.
The EITC program is recognized widely as an effective antipoverty tool, lifting an estimated 6.2 million people, including more than three million children, out of poverty in 2013.
Quick Facts about EITC
Here are some quick facts about EITC from the National Conference of State Legislatures (NCSL).
- The federal government, 34 states, the District of Columbia, Guam, Puerto Rico, and some municipalities have EITCs.
- The federal EITC has been in place since 1975, and Rhode Island enacted the first state EITC in 1986.
- More than 25 million eligible tax filers received almost $60 billion in federal EITC during the 2020 tax year.
- The average EITC amount received per tax filer was $2,411 during the 2020 tax year.
- Workers must file tax returns to receive the credit.
An estimated 20% of eligible workers do not claim EITC.
What are the Rules for Claiming a Child for EITC?
If you claim one or more children as part of your earned income credit, your child must be your:
- Son, daughter, stepchild, adopted child, or foster child
- Brother, sister, half-brother, half-sister, stepsister, or stepbrother
- Grandchild, niece, or nephew
Rules for Adopted Children
An adopted child is a child who is lawfully placed with you for legal adoption.
Rules for Foster Children
For the EITC, you can only claim a foster child that is placed with you by:
- A State or local government agency
- An Indian tribal government
- A tax-exempt organization licensed by a state or an Indian tribal government
- A court order
Additionally, for each child you’re claiming with the EITC, you’ll also need:
- A Social Security number in each child’s name. The Social Security Number and name must be exactly as they appear on their Social Security card.
- Their birthdate.
Earned Income Tax Credit Summary
We hope this post on the Earned Income Tax Credit was helpful.
If you have further questions about Tax Credits, or Personal Finance topics affecting low-income households, please let us know in the comments section below.
Be sure to check out our other articles on low-income personal finance.