What exactly is Earned Income Tax Credit?

What exactly is Earned Income Tax Credit?

The Earned Income Tax Credit (EITC) is helpful in obtaining a tax break for those individuals and families who have low-to-moderate income categories. In case, you are eligible to claim this credit you would be able to reduce your taxes and increase your tax refund. The refund you would obtain would be the amount of your credit if the EITC credit is more than the amount of taxes you owe.

According to the IRS report, around 25 million taxpayers from the US have received EITC last year and the average EITC received was approximately $2,461. However, millions of Americans are still unaware of the advantages that can be availed by the Earned Income Tax Credit. There are a lot of Americans who miss out on the EITC as they are qualified for claiming the credit newly or they do not file the tax returns as their income falls below the filing limit of the IRS.

Eligibility to claim the Earned Income Tax Credit 

You would be eligible to claim the EITC in case you can meet the income limits that are mentioned below.

1. You must be a US citizen.
2. You are above the age of 25 years or you are having qualifying children.
3. You are not filing your tax returns under the status “Married filing separately”.
4. You are obtaining your Earned income from employment and the unemployment income does not count.
5. You would be qualifying for EITC if you are obtaining your income from any home business or you provide services.

Income limits to be eligible for claiming EITC

The income limits are adjusted every year and for every year the earned income and AGI (Adjusted Gross Income) must not be more than the below-mentioned figures.

1. $50,594 for those filing tax returns as single with three or more qualifying children or $56,844 for those married and filing tax returns jointly with three or more qualifying children.

    

2. $47,440 for those who are filing their tax returns as single with two qualifying children or $53,330 for those who are married and filing tax returns jointly with two qualifying children.

    

3. $41,756 for those filing tax returns as single and having one qualifying child and $47,646 for those who are married filing their tax returns jointly and having one qualifying child.

    

4. $15,820 for those filing tax returns as single and having no qualifying children and $21,710 for those who are married filing their tax returns jointly and having no qualifying child.

What is the amount of credit?

The actual amount of credit you can claim would depend on your income and the number of your qualifying children.  The maximum credits that can be obtained for the tax year 2020 are mentioned below:-

1. $6,660 for those who are having three or more than three qualifying children
2. $5,920 for those who are having two qualifying children
3. $3,584 for those taxpayers having one qualifying child
4. $538 for those taxpayers who have no qualifying children

What do you mean by a qualifying child?

For a child to be qualifying for the EITC, there are some tests which the child must meet.

• Age –
  The child must be below the age of 19 years or the age of 24 years if he is a full-time student or he can be of any age if he is permanently disabled.

• Residency –
  You and your child should have lived in the US together for at least a period of more than half a year.

• Relationship –
  Your qualifying child can be your son, daughter, stepchild, foster child, or your brother, sister, half brother or sister, or step brother/sister.

   

• Joint Return – Your child would not be a qualifying child for claiming the EITC if he has filed a joint return. 

 Conclusion

Hence, EITC (Earned Income Tax Credit) is one of the best credits which can be of great advantage for those Americans who are struggling with their finances. Qualified tax software must be used by the Americans to maximize their EITC. However, it is advisable not to commit any fraud to obtain the credit as it can lead to being penalized by the IRS.