Taxes are stressful. The stakes are high, and the rules themselves are so complex that it’s nearly impossible for the average individual taxpayer or business owner to protect themselves on their own.
The average individual taxpayer or business owner might not have the resources to learn and take advantage of the system. However, there are a lot of programs intended to benefit them and ease their tax burden. They just need help finding the right opportunities and how to claim them.
One such opportunity is the earned income credit, which saves many families and business owners a lot of money.
What Is the Earned Income Credit?
The earned income credit is a significant tax credit available for low to moderate-income taxpayers. It is widely available for people in a specific income range. It is applied directly as a tax credit, which means it decreases taxes due.
Whereas your tax liability is the money you owe the government, a tax credit is money the government has agreed to pay you. It can significantly decrease your tax liability and, if you don’t owe very much, you may end up getting money back directly from the earned income credit.
The exact amount of your credit may depend on your income level, your dependents, and other variables detailed as you prepare and file your tax return.
Who Qualifies for Earned Income Credit?
To qualify for the earned income tax credit, your adjusted gross income must be below a certain established level. For the tax year 2020, that level was $15,280 for a single taxpayer without a qualifying child or dependent ($21,170 joint filing). As the family grows, the limit goes up to $50,954 single or $56,844 for joint filing with a family of at least three qualifying children.
You must also meet a few other requirements:
- You need a social security number
- If you are married, you must file a joint return (see below for new rules around this requirement)
- You have been a U.S. citizen or legal resident for the entire tax year
- Your investment income is limited to $10,000 (formerly $3,650)
- Your regular income has to be greater than zero
- You don’t qualify if you have to file IRS Form 2555 for foreign income
Don’t hesitate to ask for advice from an accountant if you’re not sure about qualifying for the earned income credit.
2021 Changes for the Earned Income Credit
The earned income tax credit has been around for a while; the 2021 American Rescue Plan Act (ARPA) expanded it with several measures, some temporary and some permanent.
For taxpayers in 2021, the EIC moderately increased for people with no qualifying children or dependents. You can also choose whether to use your 2019 or your 2021 earned income as the base for qualifying your credit as a percentage of that total.
The ARPA also included permanent changes to the credit aimed at making it a more substantial benefit that reaches a wider range of people:
- Limit on investment income increased from $3,650 to $10,000
- Married individuals filing separately are eligible for EIC if they lived apart from their spouse and cared for a qualifying child for a significant part of the year
- Eased requirements and penalties around providing information identifying child dependents
- Looser age requirements for claiming tax credit
Seek Out a Professional
Benefits like the earned income tax credit can put money back in your pocket and make a significant impact on your finances. Consult with a professional this year and make sure you don’t leave any savings behind. An accountant can make a difference in your small business taxes.
Stay informed and watch out for new legislation that may continue to change the EITC and other tax regulations. Working with a professional can also help you track changes as laws and regulations continue to shift.