What is the Earned Income Tax Credit (EITC)?
The earned income tax credit (EITC) is a tax credit available to working individuals with an income that falls under a specific threshold.
🤔 Understanding the earned income tax credit (EITC)
The earned income tax credit (EITC) — also known as the earned income credit (EIC) — is a tool the federal government uses to help low-income families keep more of their annual income. The federal government put the tax credit into place in 1975 as a temporary way to get more money into the hands of low-income workers. The government made it permanent in 1978; and, since then, the credit has helped those in poverty to survive. Any working individuals under a particular income level are eligible to receive the EITC, and they may receive more or less money depending on their marital status, annual income, and the number of children they have. Despite the program’s popularity, it has received criticisms from those who think it’s unfair that it allows some low-income individuals to avoid paying income taxes, or even receive the credit if they owe no taxes.
Suppose Bernard is working at a job in retail where he makes just over minimum wage. Bernard has several children at home, and he and his wife have a combined income that is just barely enough to make ends meet.
Due to their circumstances, Bernard and his wife are eligible for an Earned Income Tax Credit — The federal government uses the credit to incentivize low-income individuals to keep working. This credit puts more money in the pocket of Bernard and his wife so they can afford to raise their children.
The Earned Income Tax Credit is like a senior citizen discount, but for low-income workers...
Many establishments offer a senior citizen discount for older customers. The discount is based entirely on someone’s age. Similarly, the federal government gives particular people a discount (aka credit) on their income taxes based on their annual income, as well as the number of dependents they have to care for.
What is the history of the EITC?
President Gerald Ford signed the Earned Income Tax Credit (EITC) into law in 1975 to provide temporary financial assistance to low-income families with children. The number of families living on welfare had increased in the 1960s and 1970s. So, many policymakers were interested in finding an alternative to welfare programs.
The initiative started as a plan to provide income to families without income. By the time the bill became law in 1975, it was a tax credit for low-income working parents. The maximum credit amount available at the time was $400.
Congress initially intended the credit to last for only one year. After extending it multiple times, the federal government made the tax credit permanent through the Revenue Act of 1978.
The tax credit has continued to change over the years. First, the amount available under the credit has increased to keep up with the cost of living. Congress also made a significant change to the credit in the early 1990s when it expanded eligibility to include low-income workers without children.
Another critical change Congress made to the EITC was to base the size of the credit on the size of your family. Under the original law, every worker was eligible for the same amount regardless of how many dependents they had. So a worker supporting one child would receive the same size credit as a worker supporting six. Congress changed the credit so that those with larger families would receive a larger credit.
The passage of the EITC has also led the way for other refundable tax credits put into place to help American families. Subsequent tax credits that Congress has put into place since the EITC include the child tax credit for families with children, the American opportunity tax credit to help offset the cost of college, and the premium assistance tax credit to help subsidize the cost of health insurance.
How does the EITC work?
The Earned Income Tax Credit (EITC) is a refundable tax credit available to low-income workers. Because it is refundable, if the amount someone gets from the EITC exceeds their entire tax liability, they could pay no income taxes at all and get a refund for the amount that the credit exceeds their tax burden.
The EITC is only available to those earning an income. The more children a worker has, the higher the amount of tax credit they may receive.
The purpose of the EITC is to incentivize poor individuals to remain in the workforce. Because it has successfully kept many people, including large numbers of single parents, in the workforce, the credit has historically received bipartisan support in Congress.
To receive the EITC, eligible low-income workers claim the credit on their tax returns. The credit reduces a worker’s tax liability by the amount for which they qualify. If the amount of the tax credit is more than the worker’s tax liability for the year, that worker gets a refund for whatever is left of the credit.
Who qualifies for the EITC?
The Earned Income Tax Credit (EITC) is available to anyone who has earned income that falls under a specific threshold.
Earned income can include any income you made as an employee or as a self-employed person. Members of the armed forces can also choose to include their nontaxable combat pay. Earned income does not include pay for inmates, interest, dividends, pensions, annuities, Social Security benefits, unemployment benefits, alimony, or child support.
Depending on the number of children that a single or head of household applicant has, their annual household income must be under the following amounts for the tax year 2020:
- $41,756 for one child
- $47,440 for two children
- $50,594 for three children
For the tax year 2021 their annual household income must be under the following amounts:
- $42,158 for one child
- $47,915 for two children
- $51,464 for three children
The income caps are slightly higher for married couples with children filing jointly. To qualify for the credit, married couples must have a household income under the following amounts for the tax year 2020:
- $47,646 for one child
- $53,330 for two children
- $56,844 for three children
For the tax year 2021 married couples must have a household income under the following amounts:
- $48,108 for one child
- $53,865 for two children
- $57,414 for three children
Adults without children can also be eligible for the EITC, whether they are single or married. To qualify, childless adults must have lived in the United States for more than half the year and must be between the ages of 25 and 65.
Single individuals can earn the EITC if they have an earned income of less than $15,820 for the tax year 2020 ($15,980 for the tax year 2021), while the cap for married couples filing jointly is $21,710 ($21,920 for the tax year 2021). Married childless couples filing their taxes separately are not eligible to claim the EITC.
In some cases, the Internal Revenue Service (IRS) might send a letter to families who may be eligible for the EITC but who have not claimed it on their tax return.
How much can I get?
The amount you’re eligible to receive from the Earned Income Tax Credit (EITC) depends on your income level and the amount of income you have. In general, the amount of credit you can receive increases as your income decreases.
For the tax year 2020, the largest EITC available is $6,660 — This amount is reserved for families with three or more children. For families with two children, the maximum available is $5,920. For families with one child, the maximum available is $3,584. For families with no children, the maximum credit available is $538.
For the tax year 2021, the maximum EITC available for families with three or more children is $6,728. For families with two children, the maximum available is $5,980. For families with one child, the maximum available is $3,618. For families with no children, the maximum credit available is $543.
How do I file for the EITC?
If you qualify for the Earned Income Tax Credit (EITC), you can claim it when you file your annual tax return. If you have a qualifying child, you must also submit the form Schedule EIC along with your other forms.
To claim the EITC, the Internal Revenue Service (IRS) requires you have the following information:
- The Social Security number (SSN) of everyone listed on your tax return. If you are claiming qualifying children, you must have the SSN of those children.
- The birth dates for everyone listed on your tax return, including qualifying children
- Copies of your federal and state tax returns from last year
- Statements of all forms of income, including W-2 forms, 1099 forms, Social Security, unemployment, and business records (if you are self-employed)
- Records of expenses such as tuition, mortgage interest, and real estate taxes. For business owners, you must also provide your business expenses.
- Health insurance statements (forms 1095 A, B, or C)
- Bank account and routing numbers for direct deposit of your refund
- The name, address, and tax identification number of any paid child caretakers
If you previously claimed the EITC and had your claim denied after an IRS audit, you might also be required to fill out additional forms with your tax return.
It’s important to note that if you claim the EITC with incorrect information, the IRS could prevent you from receiving the credit for anywhere between two and 10 years. These penalties apply even if the incorrect information was supplied by mistake.
If you mistakenly share the wrong information, The IRS can ban you from claiming the EITC for two years. If you fraudulently gave false information, the ban may last 10 years.
One of the most common errors when filling out the EITC is claiming a child who doesn’t meet the qualifying child tests. To claim a child for purposes of the EITC, the child must be your son, daughter, stepchild, adopted child, foster child, or grandchild. The child could also be a sibling if they are dependent on you. The child must be under the age of 19 (or under the age of 24 if they are a full-time student) and must reside in your home for more than half the year.
Finally, only one person may claim a child for purposes of the EITC and other child-related tax credits. If two unmarried parents both claim the same child on their tax return for purposes of the EITC, it could result in the IRS denying both claims.
Anyone with an income of less than $72,000 (as of January 2021) may file their annual income taxes for free using Free File. Anyone eligible for the EITC would also qualify for Free File. Free File allows you to use a popular tax filing software such as TurboTax, H&R Block, or TaxAct to file your federal and state income tax return at no cost.
If you are claiming the EITC, the IRS cannot issue your tax refund before February 15. Even if you file your tax returns before this date, you won’t receive your return early. This delay gives the IRS time to ensure that the forms you file match the forms they receive from your employers. Delaying these returns helps to reduce fraud within the EITC.
What are the pros and cons of the EITC?
Data shows that the Earned Income Tax Credit (EITC) has been effective in helping to lift American families out of poverty. In 2018 alone, the credit helped 5.6 million people (3 million of whom were children) out of poverty. For another 16.5 million people, the credit helped to decrease the severity of the poverty in which they lived.
These economic benefits go on to benefit families in many other areas of their lives. First, researchers have found links between the EITC and increased health for both children and mothers. Additionally, children living in a family benefiting from the EITC are more likely to perform better in school and go on to enroll in college. Finally, the benefits follow those children through their entire lives, as they’re more likely to grow up to earn more money as adults.
Despite the good it has done for families living in poverty, some argue against the credit. First, there is a lot of room for error in the program. The Internal Revenue Service (IRS) compliance program finds that nearly a quarter of EITC claims have a mistake on them. Those mistakes cost the federal government about $16B per year. Some of these cases are a result of people making honest mistakes on the forms, while some are the result of intentional fraud.
Another criticism of the EITC is the minimal credit available to childless adults. The amount that working adults without children are eligible for is not enough to offset their federal tax burden or lift them out of poverty. The maximum income for childless adults is significantly lower than even the cap for adults with one child. In many states, even a worker earning minimum wage would not be eligible for the credit.
A final criticism of the EITC stems from the fact that the program costs American taxpayers billions of dollars while only benefiting low- to moderate-income families. Despite the strong bipartisan support for the program and the data showing the effect that it’s had on families in poverty, some point to the program as an expensive form of income redistribution. Critics also point to the fact that as a result of the credit, many of its beneficiaries pay no federal income taxes.
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