What is the earned income credit? a refundable tax credit


Personal Finance Insider writes about products, strategies, and tips to help you make informed decisions with your money. We may receive a small commission from our partners, such as American Express, but our reports and recommendations are always independent and objective. The conditions apply to the offers listed on this page. Read our editorial standards.

  • The Earned Income Credit is a refundable tax credit – that is, a lump sum of money “refunded” to taxpayers by the IRS – for those earning low to moderate income.
  • For the 2020 tax year, the minimum credit is $ 538 and the maximum is $ 6,660.
  • The amount of the earned income credit to which you are entitled will depend on your annual income and the number of eligible children in your household.
  • The accuracy and clarity of this article has been reviewed by Lisa Niser, Member of the Tax Review Board of Personal Finance Insider.
  • View Personal Finance Insider’s Picks For The Best Tax Software »

If you have a job and earn a low to moderate annual income, you don’t want to overlook the earned income credit when you file your taxes each year. Depending on your situation, this may be one of the most valuable tax credits available to you.

But who is entitled to the earned income credit? And how much money could that save you on your taxes this year? In this quick guide to earned income credit, we’ll cover everything you need to know.

What is the earned income credit?

The Earned Income Tax Credit, also known as EITC, is a refundable tax credit designed to help Americans with low and moderate incomes.

Since a credit is a dollar-for-dollar tax reduction and the EITC is a refundable credit, your tax bill will be reduced by the full amount of it and any remaining amount will be issued at reimbursement title.

Who is entitled to the earned income credit?

To benefit from the EITC, you will need the following:

  • At least $ 1 of earned income (taxable income and wages from working for someone else, yourself or a business you own). Unemployment income is not eligible.
  • A social security number
  • An “eligible child” or you meet the rules to apply for the EITC without an eligible child
  • Investment income for the tax year of $ 3,650 or less
  • No foreign income for which you are requesting the exclusion of income earned abroad
  • Filing status other than married separate filing

Finally, your adjusted gross income (AGI) cannot exceed the following ceilings because the amount of the tax credit for earned income that you can receive depends on your income and the number of “eligible children” in your household:

You can use the EITC Assistant on the IRS website to verify your eligibility.

Who counts as an “eligible child”?

First of all, the child will need to be your son, daughter, adopted child, stepson, foster child, or a descendant of one of them, such as your grandchild. An eligible child can also be a brother or sister or a descendant of one of them, such as a niece or nephew.

Then the child should be younger than you and be under 19. If the child is a full-time student, he cannot be over 24 years old.

Finally, if you have a totally disabled child, regardless of age, he or she is considered an eligible child.

How do I apply for the credit without qualifying children?

If you do not have eligible children in your household, you may still be eligible for the earned income credit if you meet the following conditions:

  • You will need to meet the EITC Basic Income criteria listed above
  • You must be over 25 and under 65
  • You cannot be claimed as a dependent on someone else’s return

There are also special EITC rules for military personnel, clergy, and people receiving disability benefits.

How much credit can I receive?

Here are the maximum earned income credit amounts you can receive for the 2020 tax year:

What should I watch out for?

The IRS warns that making a mistake on your EITC claim could not only delay your refund, but also result in your entire claim being denied.

Here are some of the most common earned income credit errors, according to the IRS:

  • Claim a child who does not pass all the eligibility tests for children
  • More than one person claiming the same child
  • Mismatch between social security number or last name
  • Declare as single or head of family in the event of marriage
  • Over-declaration or under-declaration of income or expenses

Make sure all of your information is accurate and up to date before applying for the EITC to avoid consequences such as a tax audit or having to pay additional taxes, penalties or interest.

Source link


About Author

Leave A Reply