FORBES (1/30/2021) - The earned income tax credit (EITC) was first enacted in 1975 to provide financial assistance to working families with children. Today, the credit has evolved and now helps taxpayers with or without children. For the tax year 2020 (which you file in 2021), you may qualify for the EITC if your income is less than $56,844.  

In the 2020 tax season (where 2019 tax returns were filed), the credit’s average amount was about $2,461, and 25 million workers and families claimed it. However, many millions are missing out: the IRS said 20% of qualifying Americans do not claim the credit on their federal tax return.  

President Joe Biden proposes to expand the EITC credit as part of the American Rescue Plan. His plan seeks to increase the maximum amount of EITC temporarily for one year from $530 to $1,500 for millions of workers without children. 

Biden’s plan would help low-income workers who earn less than $21,000 and hopes to expand income for these workers. While Biden seeks to pass his plan with bipartisan support, if not, he can use the budget reconciliation process to pass his tax proposals.

Here’s how to learn if you qualify for the EITC and what changes to expect when filing your 2020 tax return, due on April 15, 2021. 

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 earned income. Examples of earned income include wages, tip income and net self-employment income. Unemployment income, alimony, child support or interest aren’t considered earned income for EITC requirement purposes.

In 2020, millions of Americans lost their jobs, were furloughed or worked fewer hours due to the Covid-19 pandemic outbreak. According to the National Conference of State Legislatures, unemployment rates increased in 2020 to 14.7% for April, compared to the previous year, where unemployment was only 3.6%. 

Since the EITC is based on earned income, a taxpayer who only has income from unemployment will not qualify. To provide relief to those who have experienced a drop or elimination of earned income, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020 in December. This Act allows taxpayers to report earnings from either 2019 or 2020; whichever year that provides the highest tax credit.  

In order to qualify for the EITC, all taxpayers must first meet the IRS’ seven-rules test. If you meet these rules, there are additional criteria you have to fulfill, depending on whether or not you have kids. 

Your income must be under a certain threshold.

Your 2020 adjusted gross income (AGI), which is your income minus certain deductions, must be less than: 

You must have a valid Social Security number.

You must have obtained a valid Social Security number before the due date of the tax return. Typically, your tax return is due on April 15. 

Your filing status can not be married filing separately.

Your filing status, which is determined by your marital status for the IRS, must be one of the following: 

You must be a U.S. citizen or resident alien.

A permanent resident alien is an immigrant or alien admitted to the U.S. (e.g. a green card holder)

You didn’t file Form 2555. 

If you earned foreign income and are required to file Form 2555, you won’t qualify for the EITC. 

You can only have earned a certain amount of investment income.

Your investment income must be $3,650 or less for 2020. Investment income includes interest income, dividends, rents or royalties.

You must have earned some income to qualify.

Examples of earned income include wages, tips, and self-employment income. Unemployment income, alimony, child support and interest income are not considered earned income. 

For 2020 taxes, a family of three or more will receive a maximum EITC of $6,660. If you have kids, they must meet the IRS’ rules for qualifying children. A qualifying child is someone who meets all of the following criteria: 

The qualifying child must be your biological child, stepchild, adopted or foster child. The qualifying child also qualifies if it is your sibling, half-sibling, step-sibling, grandchild, niece or nephew.                      

A qualifying child must be under the age of 19 at the end of 2020. The IRS also requires the qualifying child to be younger than both you and your spouse when filing the tax return.  

For qualifying children under age 24, they must be a full-time student for at least five months during the year. A full-time student is enrolled in school and meets the school’s definition of full-time attendance.  

If the child is permanently disabled, there are no age restrictions. 

Your qualifying child must live in your United States home for more than half of the year. The IRS does allow for temporary absences. If your qualifying child is temporarily absent due to the following, they qualify for the EITC.

If your qualifying child files a joint tax return with their spouse, you cannot claim them for the EITC. However, if your qualifying child only files a joint tax return to get a tax refund on taxes withheld from their paycheck, you qualify to claim them for EITC.

For 2020, a taxpayer with no qualifying children will receive a maximum EITC credit of $538.  

The IRS requires your main home is in the United States for more than half of the year. Also, no one else can claim you as a dependent on their tax return. Finally, you must be at least 25 years of age but under 65 at the end of the year (Dec. 31).  

To claim the EITC, you must file a Form 1040 or 1040-SR federal tax return with the IRS.  

You are also required to complete Schedule EIC, which requires you to provide your qualifying child’s name (if you have a kid), Social Security number, date of birth, age, relationship and residency information. If you’re using an online tax software provider, it will help complete the form for you.  

If you claim the EITC or the Additional Child Tax Credit on your tax return, expect your tax refund to be delayed. The IRS typically delays refunds with these credits until the first week of March. To speed up the processing of your tax refund, file your return electronically and request that your refund is paid by direct deposit.  

Take care, and God bless. Continue to read Psalm 91 during this time! For more tips, subscribe to #kemcents YouTube channel.

Kemberley Washington, CPA, is a best seller author, news contributor and owner of Washington CPA Services, LLC. She contributes to her blog Kemberley.com and 21daysof.com.

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