What you need to know about the 2021 earned income tax credit – Forbes Advisor
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The Earned Income Tax Credit (EITC) was first enacted in 1975 to provide financial assistance to working families with children. Today, credit has evolved and now helps taxpayers with or without children. For the 2020 tax year (which you file in 2021), you may be eligible for the EITC if your income is less than $ 56,844.
In the 2020 tax season (where the 2019 tax returns were filed), the average credit amount was approximately $ 2,461 and 25 million workers and families claimed it. However, several million are missing: The IRS said 20% of eligible Americans do not claim the credit on their federal tax return.
President Joe Biden proposes to extend EITC credit under the American rescue plan. His plan is to temporarily increase the maximum amount of the EITC for one year from $ 530 to $ 1,500 for millions of childless workers.
Biden’s plan would help low-income workers earning less than $ 21,000 and hopes to increase the incomes of these workers. Although Biden seeks to pass his plan with bipartisan support, if not, he can use the budget reconciliation process to pass its tax proposals.
Here’s how to know if you’re eligible for the EITC and what changes to expect when filing your 2020 tax return, due April 15, 2021.
What is the income tax credit?
The EITC is a refundable tax credit, which means it can reduce the amount of taxes you owe and generate a refund.
The EITC is based on a percentage of your professional income. Examples of earned income include wages, tips, and net self-employment income. Unemployment income, alimony, child support, or interest is not considered earned income for the purposes of EITC requirements.
Taxpayers Have New Option to Claim the 2020 Earned Income Tax Credit
In 2020, millions of Americans lost their jobs, were put on leave, or worked fewer hours due to the Covid-19 pandemic outbreak. According to National Conference of State Legislatures, unemployment rates rose in 2020 to 14.7% in April, compared to the previous year, when unemployment was only 3.6%.
Since the EITC is based on labor income, a taxpayer who has only unemployment income will not be eligible. To relieve those who have suffered a decline or elimination of their earned income, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act, 2020 in December. This law allows taxpayers to declare income for 2019 or 2020; regardless of the year that offers the highest tax credit.
7 rules all taxpayers must follow to qualify for the EITC
In order to qualify for the EITC, all taxpayers must first pass the IRS Seven Rules test. If you follow these rules, you must meet additional criteria, depending on whether or not you have children.
Rules for taxpayers with qualifying children
For 2020 taxes, a family of three or more will receive a Maximum EITC of $ 6,660. If you have children, they must follow IRS rules for qualifying children. An eligible child is someone who meets all of the following criteria:
The child must be related to you
The eligible child must be your biological child, stepson, adopted child or foster child. The eligible child is also eligible if it is your brother, half-brother, brother-in-law, grandchild, niece or nephew.
There are age limits
An eligible child must be under 19 at the end of 2020. The IRS also requires that the eligible child be younger than you and your spouse when filing the tax return.
For eligible children under the age of 24, they must be full-time students for at least five months during the year. A full-time student is enrolled in the school and meets the school definition of full-time attendance.
If the child is permanently disabled, there is no age restriction.
Your child must live with you
Your eligible child must live in your home in the United States for more than half of the year. The IRS allows temporary absences. If your eligible child is temporarily absent for the following reasons, he or she is eligible for EITC.
- Go to school
- Serve in the army
- Absent for vacation or business purposes
- Detention in an institution for minors
Your child cannot file a joint income tax return
If your eligible child files a joint tax return with their spouse, you cannot claim it for the EITC. However, if your eligible child only files a joint tax return to get a tax refund on the taxes withheld from their paycheck, you can claim it from the EITC.
EITC rules for taxpayers without children
For 2020, an eligible childless taxpayer will receive a maximum EITC credit of $ 538.
The IRS requires that your primary residence be in the United States for more than half of the year. Also, no one else can claim you as a dependent on their income tax return. Finally, you must be at least 25 years old but under 65 at the end of the year (Dec. 31).
File your taxes ASAP, but expect refund delays
To apply for the EITC, you must file a federal income tax return form 1040 or 1040-SR with the IRS.
You are also required to complete the EIC appendix, which requires you to provide your eligible child’s name (if you have a child), Social Security number, date of birth, age, relationship, and residence information. If you are using an online tax software provider, they will help fill out the form for you.
If you request the EITC or the Additional child tax credit on your tax return, expect your tax refund to be delayed. The IRS typically delays repayments with these credits until the first week of March. AT speed up the processing of your tax refund, file your return electronically and request that your refund be paid by direct deposit.