Posted by Carmen Garcia

What is the EITC (Earned Income Tax Credit)?

What is the EITC (Earned Income Tax Credit)?

The EITC (earned income tax credit) is a refundable credit that applies to all taxes owed after completing the return and calculating the amount owed. The Internal Revenue Service will send you a refund of the difference if anything is left after paying the tax debt. The loan amount varies depending on your income and the number of people you have.

The federal government created the EITC to help low-income taxpayers keep more of their hard-earned money. It was intended as a temporary legislative provision, but the credit will be available in 2020 if you qualify under several rules.

What is the Earned Income Tax Credit?

The maximum EITC amount for the fiscal year 2019 (the return that you submit in 2020) are:

  • $ 529 if you have no children

  • $ 3,526 if you have a child

  • $ 5,828 if you have two children

  • $ 6,555 if you have three or more eligible children

These credit values increase each year to keep up with inflation. These are set at $ 6,660, $ 5,920, $ 3,584, respectively $ 538 for fiscal 2020, the return you will report in 2021.

How the Earned Income Tax Credit works

The EITC is calculated using a percentage of income called the "credit rate." As a result, lower-income taxpayers and larger families receive larger loans. The loan is eliminated and is not available at all for those whose income exceeds certain limits based on marital status.

You must have received income to qualify, but not too much. Wages and income from work and income from self-employment are defined as income.

Both earned income, and adjusted gross income (AGI) must be below a certain threshold to benefit from the EITC. Your AGI is your income that generates fewer income adjustments that you don't have to pay in taxes, such as IRA contributions. Your AGI appears on line 8b of Form 1040.

Earned income and AGI must be less than these values in 2019 if you are single, earning, head of household, or a qualified widower:

  • $ 15,570 if you have no children

  • $ 41,094 if you have a child

  • $ 46,703 if you have two children

  • $ 50,162 if you have more than three eligible children

The increase in income limits for married taxpayers who file joint returns are:

  • $ 21,360 if you have no children

  • $ 46,884 if you have a child

  • $ 52,493 if you have two children

  • $ 55,592 if you have more than three eligible children

Investment income cannot exceed $ 3,600 as of the 2019 fiscal year, including interest, dividends, capital gains, and royalties. It can be reported on a Form 1099-MISC or, for dividends, on a Form 1099-DIV. Institutions, where you have investments or accounts must send copies of these forms after the first of the year.

Advantages and Disadvantages of the Earned Income Tax Credit

You will have to wait a little longer to receive a refund from the EITC, even if part of the refund is for taxes you overpaid during the year. The PATH (Protecting Americans from Tax Hikes) Act requires the IRS to withhold refunds that claim this credit until February 15. This gives the government some time to investigate the possibility of fraudulent claims.

Note: A late refund doesn't mean the IRS suspects you've committed fraud. The law applies to all tax returns claiming the EITC.

However, this can be a really big tax credit for some taxpayers, so it's worth the wait.

Earned Income Tax Credit Requirements

You must attach the Schedule IEC to Form 1040 to apply for the EITC for one or more qualified children. Taxpayers should also follow a few other rules to apply for this loan:

  • If married, you and your spouse cannot be claimed by someone else as an eligible child.

  • You cannot request excluding income earned abroad, which refers to your salary during your stay abroad.

  • You must be an American citizen or foreign resident throughout the year.

  • You must have a valid SSN (social security number).

If you don't have a qualified child, additional rules apply:

  • Must have lived in the States for more than half the year

  • If you are submitting a joint declaration, you and your spouse must be between 25 and 64 years of age.

Finally, you cannot apply to the EITC if your filer status is married filing separately, but if you are separated from your spouse, and your spouse has not lived with you during the last 6 months of the year, you may be eligible to file as the head of household. This status will allow you to apply to the EITC.

Qualification Requirements for Children

The rules for eligibility for EITC children are slightly different from those for dependents in general. The EITC Child Assessment Rules are based on four tests:

  • Proof of Age: the child must be at least 18 years of age at the end of the fiscal year or 24 or younger and be a full-time student for at least five months. You can claim an EITC eligible individual, regardless of age, if the dependent person is totally and permanently disabled. You (or your spouse, if married upon joint filing) must be older than your dependent.

  • Proof of Joint Return: A child claiming to be dependent on an EITC cannot file a joint return with their spouse. An exception is if your dependent files a joint return exclusively to claim a refund and does not claim any deductions or tax credits on their return.

  • Proof of Parentage: the child must be related to you by birth, marriage, adoption, or live with you under a foster agreement. The child can be your daughter, son, stepson, grandson, niece, nephew, brother, sister, or an eligible adopted child. Adopted kids are treated the same as children at birth. A licensed placement agency must place adopted children.

  • Proof of Residence: the child must have lived with you in the United States for more than half of the year for at least six months and one day.

The child must also have a valid Social Security number issued before the tax return date, including the necessary file extensions.

Consider asking the IRS for an extension of the filing deadline if the tax deadline is approaching and you don't yet have your child's Social Security number. To request an extension, complete Form 4868 before tax day, and you will have until October 15 to file your return.

Carmen Garcia
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