Do I qualify for the Earned Income Credit?

 

The Earned Income Credit (EIC), aka Earned Income Tax Credit (EITC) is a valuable credit for low-income taxpayers who work and earn an income of a certain amount.

This credit is highly valuable and is often missed—allowing you to keep more of your hard-earned money.

Good news for your 2020 tax returns filed in 2021 A special “lookback” rule in the Dec. 2020 stimulus bill may let you continue to claim this valuable credit – even if your income changed in 2020. If your 2019 earned income is higher than your 2020 earned income, the lookback allows you to use 2019 earned income to calculate the 2020 earned income credit.

If you qualify for this tax credit, you can reduce your taxes and increase your tax refund. The credit ranges from $538 to $6,660 depending on your tax filing status and quantity of qualifying children.

But it can be difficult to understand the rules surrounding this underutilized tax credit, which is why some people shy away from this credit.

Read on to learn more about what it is, who qualifies, and why it’s beneficial.

How much is the Earned Income Tax Credit worth?

Taking the time to check the Earned Income Credit eligibility can pay off, as the tax benefit can be worth up to $6,660 depending on your:

  • Filing status
  • Income
  • Number of qualifying children who can’t be claimed by another taxpayer

What exactly qualifies as earned income?

Earned income includes:

  • Long-term disability benefits
  • Net earnings from self-employment
  • Non-taxable combat pay
  • Salary
  • Tips
  • Union strike benefits
  • Wages

It doesn’t include passive income, which means income that you aren’t actively generating on your own, like interest and dividends. It doesn’t include pay that you receive while incarcerated, retirement income, Social Security, unemployment benefits and alimony. It also doesn’t include child support: Remember, that’s tax neutral.

Earned Income Credit eligibility

You might be asking yourself, “Do I qualify for the Earned Income Tax Credit?”

Here’s more information about the Earned Income Credit eligibility. The Earned Income Credit is refundable, so you can receive the credit as part of your refund, even if your tax has been reduced to $0.

Earned Income Credit eligibility includes the following:

  • You and your spouse (if filing jointly) must have valid Social Security numbers (SSN) by the due date of your tax return (including extensions)
  • You can’t file as married filing separately (MFS)
  • You must be a U.S. citizen or resident alien all year
  • You can’t file a Form 2555
  • You must have investment income of $3,650
  • You can’t be a dependent or qualifying child of another person for EIC purposes
  • You must have earned income less than the AGI limit  for your filing status and number of qualifying children

Earned Income Tax Credit eligibility if you have no children

If you don’t have qualifying children, Earned Income Tax Credit eligibility is as follows:

  • Be at least 25 years old but younger than 65
  • Not be a dependent of another taxpayer
  • Not be a qualifying child of another taxpayer
  • Live in the United States for more than half the year

The Earned Income Credit income limit

To qualify for the earned income credit if you don’t have a qualifying child, you must have earned income and adjusted gross income (AGI) of less than:

  • $15,820 if filing single
  • $21,710 if married filing jointly

Earned Income Credit qualifications with one or more children

Earned Income Credit qualifications with one or more children are as follows:

Age —Your child is under the age of 19 or a full-time student under the age of 24, and is younger than you (and your spouse, if filing jointly). (If your child is permanently and totally disabled, the age requirements don’t apply.)

Relationship —A qualifying child must be one of these:

  • A son, daughter, stepson, stepdaughter, or eligible foster child
  • A brother, sister, stepbrother, stepsister, half-brother, or half-sister
  • A descendant of any of those people (for example, a grandchild, niece or nephew)
  • These rules also apply to relationships:
    • Relationships established by marriage aren’t ended by death or divorce.
    • An adopted child is treated as your own child. An adopted child is any child legally placed with you for legal adoption.

Residency —The child must live with you in the same main home within the U.S. for more than half of the year. This doesn’t include Puerto Rico or other U.S. territories or possessions.

Exceptions are allowed for:

  • Temporary absences
  • Children born or deceased during the year (if your home was the child’s home for over half of the time they were alive)
  • Kidnapped children
  • Those who are on extended active duty outside of the United States. They can be treated as having a main home within the United States. Extended active duty equals more than 90 days or for an indefinite period.

Citizenship — A qualifying child must be a U.S. citizen, U.S. national, or U.S. resident. A child who’s a resident of Canada or Mexico doesn’t qualify.

Qualifying child and dependency requirement — Your qualifying child can’t be used by more than one person to claim EIC. You can’t be a qualifying child of another person. You don’t have to claim the child as a dependent. However, a married child is only a qualifying child for EIC purposes if you could claim the child as a dependent.

Marital status — A qualifying child must not file a joint return unless both of these are true:

  • They only file a return to claim a refund.
  • No tax liability would exist for either spouse if both of them had filed separate returns.

Social Security number (SSN) requirement —A qualifying child must have a valid SSN. These don’t qualify:

Filing status — You can’t be married filing separately.

Earned income —You must have earned income to meet the qualifications for the Earned Income Credit. Unearned income (interest, sale of investments, pensions, and unemployment) doesn’t qualify for the credit. If you’re a military taxpayer with nontaxable combat pay, you can include the combat pay in income to calculate the EIC .

Note for your 2020 tax filing: A special “lookback” rule in the Dec. 2020 stimulus bill may let you continue to claim this valuable credit – even if your income changed in 2020. If your 2019 earned income is higher than your 2020 earned income, the lookback allows you to use 2019 earned income to calculate the 2020 earned income credit.

The Earned Income Credit income limits for those with one or more children

Income limit — Your earned income and AGI must be less than these limits:

  • With one qualifying child: $41,756, or $47,646 if married filing jointly
  • With two qualifying children: $47,440, or $53,330 if married filing jointly
  • With three or more qualifying children: $50,954, or $56,844 if married filing jointly

Investment income limit — For 2020, you can only claim the EIC if your investment income is $3,650 or less. Investment income includes:

  • Interest
  • Dividends
  • Capital gains
  • Royalties
  • Rental income
  • Passive activity income

Filing state tax returns

If you have to file one or two state tax returns, note that the Earned Income Credit is only calculated on your federal return. Some states offer their own version of the credit, which may be based on the federal amount or calculated separately. See the instructions for the state you’re filing.

If you didn’t claim the EIC last year, can you amend your return and claim it?

To claim the Earned Income Credit for last year, you must amend your return by filing tax Form 1040X by the later of these dates:

  • Within three years from the due date of your original return
  • Within two years from the date you paid the tax

Returns filed before the due date — without regard to extensions, such as tax Form 1040 or Form 1040X — are considered filed on the due date. Note that if you now have a valid SSN but didn’t claim the EIC last year because you or your child had an ITIN, you may not go back and amend your return to claim the EIC for earlier years.

What if you have an EIC error?

An error when filling out the EIC portion of your return could delay your full refund.

If the IRS denies your whole EIC claim:

  • Must pay back EIC amount you’ve been paid in error, plus interest
  • Need to file Form 8862, “Information to Claim Earned Income Credit After Disallowance” before you can reclaim the credit if the credit was denied or reduced for any reason other than a math or clerical error

EITC filers facing refund delays should file as they normally would

 Millions of taxpayers could have their refunds delayed. The IRS is required to hold refunds for returns claiming the earned income tax credit (EITC) and additional child tax credit (ACTC) until the end of February.

Taxpayers should file as they normally would, even if they expect their refund will be delayed. The IRS still expects to issue most refunds in less than 21 days.

Missing out on claiming the Earned Income Tax Credit can prove costly to the one in five eligible taxpayers who overlook the opportunity.

More help with the Earned Income Credit

If you’re looking for more hands-on guidance with claiming the Earned Income Credit, H&R Block can help. Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you get back the most money possible.

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