What is the EITC, or Earned Income Tax Credit?

Feb 19, 2022 By Triston Martin

A tax credit known as the Earned Income Tax Credit (EITC) may allow you to receive money back from the IRS at tax time or reduce your overall federal tax burden. You can claim the credit if you're single, married, or have children. The most important rule is that you must have a job and support yourself.

The credit might eliminate any federal tax you owe. If your EITC refund is greater than your tax bill, you will get the difference in your refund. There's a chance you'll get money back even if you don't owe any taxes because of the credit.

In addition to the federal EITC, 29 states and the District of Columbia have implemented their own state EITCs. You can determine if your state offers an EITC by looking at this map of EITCs offered by different states.

Earned Income Tax Credits and Their Effects

Working parents with low or moderate incomes who can prove they have a qualifying kid because of their connection, the child's age, their place of residence, or their tax filing status can take advantage of the earned income tax credit (EITC).

In the past, the American Rescue Plan (ARP) greatly enlarged the credit for employees without qualifying children (commonly referred to as childless workers).

The EITC is a benefit only to those who work. Workers are given credit equivalent to a percentage of their wages up to a maximum credit amount. Families with more children are eligible for bigger credits, both in terms of the credit rate and the maximum credit amount.

If a family has three or more children, the highest credit they can receive were $6,728 in 2021. The highest credit available to employees without children is $1,502, more than three times the previous level.

The Earned Income Tax Credit (EITC): What You Should Know (EIC)

The EIC, also known as the earned income tax credit (EITC), was developed as a "work bonus scheme." It's still seen as a way to help the poor. The EIC is exclusively accessible to taxpayers with low or moderate incomes, regardless of whether they have dependents who qualify or not.

Individual taxpayers (or, if married, the individual or their spouse, filing jointly) must be between the ages of 25 and 64 and have lived in the United States for more than half of the tax year to claim the credit for 2020.

Dependent children under 19, students under 24, or dependents with a handicap are all considered eligible dependents for the 2020 tax year. According to a taxpayer's filing status and the number of dependents, the credit percentage, earnings maximum, and credit amount change.

These criteria similarly determine the income phase-out above which the credit declines to zero. The phase-out range has a ceiling on the amount of credit taken.

Earned Income Credit Changes for 2021

EIC standards for the 2021 tax year have been changed by the American Rescue Plan Act of 2021 has changed EIC standards for taxpayers with no qualified dependents.

There will be an increase from 7.65% to 15.35% in the credit rates and phase-out ranges, and the maximum earned income amount will rise to $9,820 and $11,610, respectively, for taxpayers without qualifying dependents in 2021, even though annual inflation adjustments should raise these ceilings, phases out and credit limits.

The new legislation will take effect in 2021 that cuts the age barrier for taxpayers with no qualifying dependents to 19 and boosts the maximum investment income from $3,650 to $10,000.

It will be possible to claim the EIC on separate tax returns under new guidelines more than current family law practice. Taxpayers will also be able to take advantage of a unique economic-crisis relief regulation that allows them to base the credit on their 2019 or 2021 income.

Ideas for Change

Congressional Democrats and Republicans have previously suggested similar revisions to the American Rescue Plan for childless employees (Marr 2015; Maag and Airi 2020).

Even if you don't have children, you may still profit from reform by splitting the credit into two parts—one for your job and your kids' education. The President's Advisory Panel on Federal Tax Reform (2005), the Bipartisan Policy Center (2013), and Maag are just a few instances of this sort of reform plan (2015b).

Inaccuracies and the Error Rate

According to an IRS compliance review, EITC payments may be delivering more than a quarter of all payouts incorrectly. The most common source of inaccuracy was evaluating whether a kid was eligible for the EITC (IRS 2014).

To be eligible, the kid must spend at least half of the year with the parent (or another relative) claiming the EITC. The IRS cannot track compliance because it does not get administrative data that can confirm where a child spent the bulk of the year.

To authenticate a child's residency, administrative data from other programs have not been effective (Pergamit et al., 2014).

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