Missing Out on the Earned Income Tax Credit?

Watch Out for Tax Penalties
September 29, 2020

Article Highlights:

  • Earned Income Tax Credit
  • Refundable Tax Credit
  • Qualifications
  • Special Rule for Military

The EITC is for people who work but have lower incomes. If you qualify, it could be worth up to $6,660 in 2020, up from $6,557 in 2019, so you could pay less federal tax or even get a refund. The credit is a refundable credit, which means you can get the benefits of the credit even if you do not owe any taxes. That’s money you can use to make a difference in your life.

Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it simply because they don’t understand the criteria. Plus, many individuals who never qualified for the EITC previously may be eligible in 2020 because their income will be lower as a result of the COVID pandemic.

If you qualify for but failed to claim the credit on your return for 2017, 2018 and/or 2019, you can still claim it for those years by filing an amended return or an original return if you have not previously filed.

The EITC is based on the amount of your earned income (EI) and whether there are qualifying children in your household. The credit increases as the taxpayer’s earned income or adjusted gross income (AGI) increases until it reaches a plateau, where it remains constant at the maximum credit amount until it reaches the AGI phase-out threshold. Once the threshold amount is exceeded, the credit is reduced by a set percentage, and no credit is allowed once the income exceeds the top of the phase-out range. The following table illustrates the maximum credit and phase-out ranges based on filing status and number of children for 2020.

Filing StatusNumber of ChildrenCredit %Maximum CreditEI Phase-out Threshold StartsEI Phase-out Threshold Ends
Joint FilingNone7.65$538$14,680$21,710
Joint Filing134.00$3,584$25,220$47,646
Joint Filing240.00$5,920$25,220$53,330
Joint Filing3 or more40.00$6,660$25,220$56,844

If you have children, they must meet relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit. The EITC income qualifications are annually inflation-adjusted.

To claim the credit, you must meet a few basic rules:

  • You (and your spouse, if married and filing jointly) must have a valid Social Security number (SSN).
  • If you have a qualifying child, the child also must have a valid SSN.
  • You must have earned income from employment or from self-employment.
  • Your filing status cannot be married, filing separately.
  • You must have been a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
  • You cannot be a qualifying child of another person.
  • Your investment income for 2020 cannot exceed $3,650 (call for other years).
  • If you do not have a qualifying child, you must:
  • Be age 25 but under 65 at the end of the year,
  • Live in the United States for more than half the year, and
  • Not be a qualifying child of another person.
  • You cannot file Form 2555 (excluding foreign earned income)

Active Military – Members of the military can elect to include their nontaxable combat pay in their earned income for the earned income credit. If that election is made, the military member must include all nontaxable combat pay received as earned income. If spouses filing a joint return both received nontaxable combat pay, then each one can make a separate election.

Disabled – Disabled individuals frequently overlook the opportunity to claim this credit. Even though they may not be working and earning income, certain disability income is treated as earned income for purposes of the EITC and includes the following amounts:

  • Disability benefits attributable to the employer’s payment of disability policy premiums. However, nontaxable disability income from policies whose premiums the employee paid, and Social Security benefits, are not “earned income” for purposes of the EITC.
  • Long-term disability benefits to an individual who is retired on disability are only earned income until the individual reaches the minimum retirement age, which is generally the earliest age at which the individual could receive a pension or annuity if not disabled.

If you have questions about your qualifications for this credit or need help amending or filing a prior year’s return to claim the credit, please give this office a call.

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