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Earned Income Credit: Watch Out For These Things to Avoid Being Disqualified

Earned Income Credit: Watch Out For These Things to Avoid Being Disqualified

To help support low-income to moderate-income workers, a refundable tax credit has been designed called the Earned Income Credit (EIC). The amount of tax owed is being reduced through it may even result in a refund. Some people accidentally impact their EIC eligibility without knowing and claiming it one year doesn’t automatically qualify them from the next which what many people don’t realize. Here are the common reasons why people who claim EIC get disqualified or can qualify for it.

1. Not having earned income. In order to qualify, having earned income is a must. You are required to have earned income such as wages, salary, or tips if you want to claim the EIC. You need to consider that money you get from a job as an earned income instead of passive income like from a bank account interest. There are also people who aren’t aware that earned income can come from self-employment, contractor fees, and side gigs earnings. Let’s not also forget, there are disability retirement benefits that can qualify as earned income. Child support, pensions, and unemployment, however, do not qualify. A person’s adjusted gross income (AGI), filing status and number of children claimed are the basis of the EIC requirements. The income threshold amounts for 2019 has already been published by the IRS. a 

2. Having too much investment. EIC eligibility is also impacted by having too much investment income. Making a little extra cash from renting out a room might be something you need to reconsider. Your EIC eligibility is impacted due to the fact that rental income equals investment income. Things like interest, dividends, and passive activity income are just some of the types of investment income. From year to year, investment income maximums vary and for the year 2019, an amount of $3,600 or less must only be your investment income in order to qualify for the EIC.

3. Filing under the wrong status. When claiming your EIC, your filing status matters a lot. If you’re married filing jointly, head of household or single, you can claim the credit. However, those who are married filing separately, Earned Income Credit are not made available for them.  You’ll also find that there are changes to income thresholds if you get married or divorced from one year to the next. Consider consulting a tax professional if you’re unsure which filing status is right for your situation. 

4. The number of children you claim. The EIC largely benefits families with children although the credit is open to anyone who meets the qualifications. For each child, the credit max increases but beyond three children, the credit increase will stop. The parent to whom the child(ren) live with for more than six months of the year for children of divorced parents would claim the EIC (only if they qualify). There are cases where a grandparent caring for a grandchild may be eligible to claim the EIC but when multiple generations of a family live together, determining who can claim EIC for a child can become complicated.

5. Not filing your taxes. In order to claim the Earned Income Credit, you are required to file your taxes. Every year, there are millions of people who miss out on the IEC for the simple reason that they didn’t file a tax return. Even if you do not owe any tax or are not required to file, you must file a tax return if you want to get the EIC. Within three years of the missed deadline, you may still be able to file your return if you missed the tax filing deadline in order to claim EIC. 

The one last thing you need to remember about Earned Income Credit is that its requirements vary from year to year. It can be confusing to determine EIC eligibility but if you do end up qualified, it is also well worth it. Don’t hesitate to reach out to a tax professional if you still have questions as they are specially trained to help and are always available every year. You may also visit the IRS website to learn more about Earned Income Credit. 

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