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EITC & Why You Should Notify Your Employee

EITC & Why You Should Notify Your Employee

The Earned Income Tax Credit, or EITC, provides tax benefits to low- and middle-income workers and families. Credit range from $1,502 to $6,728 for fiscal year 2021 and $560 to $6,935 for 2022. The figure you receive depends on your income, filing status, and the number of children you have. Qualified workers without children can also claim the income tax credit.

In general, the less you earn, the more earned income credits you earn. Since it is a refundable tax credit, low-income taxpayers with little or no tax liability can still receive the full amount of the credit as a tax refund.

It is important to note that tax deductions and tax credits can change the amount owed, but they work differently. Deductions reduce the amount of total taxable income, while loans reduce the amount of tax you owe, and some, like the EITC, can refund you even if you don't owe tax.


Who is eligible for the Federal EITC?

The EITC was created by the Tax Cuts Act of 1975 as a temporary way to help low-income workers offset Social Security wages and increased food and fuel costs energy. It was considered "an anti-poverty program and an alternative to welfare because it encouraged work." The Revenue Act 1978 made the EITC permanent.

To qualify for the EITC, you will need:

  • At least $1 of earned income from self-employment or employment 

  • Investment income of less than $10,000 for the fiscal year

  • No foreign income for which you are claiming the foreign income exclusion on Form 2555

  • A valid SSN

  • US citizenship or a resident alien status

  • A filing status that is not married filing separately, unless the new requirements for married but separated spouses are met.

An eligible child who meets the criteria of age, relationship, residency, and joint return

  •  OR, with no eligible children, must have lived in the United States for more than half the year, not be declared a dependent of someone else, and be between the ages of 25 and 65 at the end of the tax year.

There are special qualification rules for military, clergy, and workers with disabilities or children with disabilities.

In addition to the primary requirements, your adjusted gross income (AGI) must be below the income threshold to qualify. Here is a summary:

Earned Income Tax Credit for 2021

Dependents

Maximum AGI

(single or head of household)

Maximum AGI (married filing jointly)

Maximum EITC

0

$21,430

$27,380

$1,502

1

$42,158

$48,108

$3,618

2

$47,915

$53,865

$5,980

3 or more

$51,464

$57,414

$6,728

 

 

If you have children, the income limits and maximum credits don't change much for 2022. However, workers without children will struggle to qualify and receive fewer credits if they do. Here's what to expect:

Earned Income Tax credit for 2022

Dependents

Maximum AGI

(single or head of household)

Maximum AGI (married filing jointly)

Maximum EITC

0

$16,480

$22,610

$560

1

$43,492

$49,622

$3,733

2

$49,399

$55,529

$6,164

3 or more

$53,057

$59,187

$6,935

 

 

If you have not claimed the EITC in previous years and think you qualify, you may still have time. You can file an amended return to receive a credit for any (or all) of the last three tax years for which you should have received credit.

Note: You must file a tax return to get an income tax credit, even if you wouldn't need to file otherwise.


How has the American Rescue Plan Act affected the EITC?

The ARPA (American Rescue Plan Act) of 2021 expanded the impact of the EITC in several ways, with some rules only affecting 2021 and others affecting 2021 and beyond.

A temporary modification applies to workers without children. ARPA introduced new and special rules for 2021 to make it easier for people without children to apply for credit. ARPA nearly tripled the maximum credit for childless workers from $538 to $1,502 in 2021. By default, the change also increases state earned income tax credit calculated as a percentage of the federal credit.

Meanwhile, the threshold for eligible investments has increased from $3,650 in 2020 to $10,000 in 2021.

ARPA also adjusted requirements for married but separated spouses, who can now claim the EITC if they don't file jointly, live with the eligible child for more than six months, and are legally separated under the state law or do not have the same primary residence as the other spouse for a minimum of the last six months of the year.


Bottom Line

The Earned Income Tax Credit can provide substantial tax exemptions for low-income workers and families. If you comply with your tax return, be sure to claim a credit on your tax return when you file your tax return but keep in mind that you will not receive a refund immediately. By law, the Internal Revenue Service must wait until March to issue refunds to taxpayers applying for the EITC.

Due to years of fraudulent applications for this credit, the IRS has implemented more restrictive processing procedures, deferring repayments in certain situations until further investigation can be conducted.

Finally, you can use 2019 or 2021 earnings to calculate the EITC for 2021. Be sure to run the numbers back and forth and use the earning year that results in the highest credit value.


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