Before jumping into the concept of earned income tax credit, it may be useful to properly define the concept of earned income. This is simply money that you earn from business ventures you may engage in for yourself or as an employee of someone else.
Therefore, it covers the full spectrum of salaries, revenue, tips, etc. However, unemployment benefits, alimony, child support, and retirement income do not fall under this category.
With that out of the way, how does it fit into earned income tax credit (EITC)? By the time you’re finished, you should understand what EITC is, how it works, and what qualification requirements may look like.
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What Is the Earned Income Tax Credit (EITC)?
Put simply, it’s a refundable tax credit that workers within the low-to-moderate income bracket get on federal tax returns. If you were to look at it purely through scaling, then you could say that the less you earn, the greater your tax credit is going to be.
As you know, your tax liability is based on what you earn and totals a potentially variable amount every year. During any given federal tax return period, tax credits are also calculated and potentially variable. The EITC on your earned income for a given period reduces your tax liability by whatever amount it (the EITC) may be.
Assuming you have no taxes in arrears, the IRS then does a direct deposit to your bank account or sends a check. Additionally, provided there are no withheld taxes from your earned income, you may even find yourself getting cash from the IRS.
How Does the Earned Income Tax Credit Work?
The best way to outline how the earned income tax credit works is by laying out some of the stipulations.
First, provided your filing status is as a qualifying widower, head of your household, or single, your earned income cannot exceed $51,464, $47,915, $42,158, or $21,430 with three or more qualifying children, two qualifying children, one qualifying child or no claimed children, respectively in the tax year 2021.
If you are married and your return is being filed jointly, then the income allowances for the same categories above have limits of $57,414, $53,865, $48,108, and $27,380, respectively.
Just in case you’re a bit confused about what qualifying children may be, it can be a biological child, foster child, stepchild, or adopted child. Depending on the situation in the household, siblings, half-siblings, and stepsiblings may also qualify.
A child who falls under one of these groups must be younger than 19 years old at the end of the year. Note, however, that exceptions are made for full-time students, with the age limit reaching as high as 23 years old. If filing with your spouse, the child must be younger than both of you.
Even without any qualifying children in the mix, you may still qualify for the EITC, provided you meet the income requirements, as well as a few others.
You need to have lived in the US for a minimum of six months, not have been a dependent or claimed as a child on another tax return and be at least 19 years old. Note, however, that if you were a student for more than five months in the year, then the minimum age becomes 24 years old.
Qualifications for the EITC
Now, it’s onto the qualification segment. Refer to the section about what constitutes earned income above just in case there is any confusion. With that in mind, you must have some form of earned income. Additionally, note the following:
- Any gains from investments cannot exceed the $10,000 threshold.
- You must have a valid Social Security Number.
- For the entire tax year, your citizenship status must have been either that of a resident alien or a U.S. citizen.
- You cannot be the dependent or qualifying child on another taxpayer’s claim.
- Finally, you cannot claim foreign earned income exclusion on form 2555.
Final Remarks
One final concern you may have is how much the tax credit is. For the 2021 tax year, individuals with no children can get up to $1,502. The highest figures are paid out to filers with three or more children, reaching a maximum of $6,728.
All other categories mentioned above fall somewhere in between that bracket. Note, that you don’t automatically get the maximum figure outlined for your class. It still depends on what your earned income looks like. However, these figures are meant to be guidelines to indicate what your maximum expectation should be.
Online calculators are available to help you get an estimate of what your EITC would look like.
Tax credits can sometimes be a bit of a challenge to understand. Hopefully, with the information above, there is greater clarity where the EITC is concerned. Now, you should be more familiar with what the EITC is, how it works, what kind of payout to expect, and what the qualification may look like.
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If you’re looking for a reputable CPA firm in El Paso, TX consider calling us at Marcus, Fairall, Bristol + Co., PLLC! We’ll answer any and all of your accounting related questions such as IRS issues. We offer our clients with a variety of accounting services such as the following:
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230 Thunderbird Dr Ste G, El Paso, TX 79912
Phone: (915) 775-1040