You may be inquiring about the Earned Income Tax Credit-
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use either their 2020 or 2019 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC).
One of the most beneficial and refundable tax credits for families with low or moderate incomes is the Earned Income Tax Credit (EITC).
Here are five facts about the EITC all taxpayers should know.
1. Eligibility is limited to low-to-moderate income earners
The general eligibility rules for the EITC are fairly straightforward:
- Taxpayers must file as individuals or married filing jointly.
- If married, you, your spouse and your qualifying children must have valid Social Security numbers.
- You must also be 25 or older but younger than 65.
Although the EITC typically is considered a credit for low-income filers, there are many variations of income, filing status and number of qualifying dependents that affect eligibility. For example:
- In 2020, a married couple with three children and adjusted gross income of $56,844 or less could receive up to $6,660.
- An individual who earns $15,820 and has no children may receive up to $538.
It's recommended that all filers explore their eligibility for receiving the EITC each year. For the 2020 tax year, the maximum credit is $6,660. According to the Internal Revenue Service, the average amount credited in 2018 was $2,488.
2. Self-employed still counts
Many filers, especially self-employed individuals, fail to take advantage of credits because they think they are ineligible.
The IRS considers all income that is earned eligible for the credit. That includes:
- Wages
- Salaries
- Tips
- Union strike benefits
- Long-term disability benefits received prior to minimum retirement age
- Net earnings from self-employment
- Gross income received as a statutory employee (an independent contractor under common law rules)
Types of income that do not qualify as earned income for the credit include:
- Child support
- Retirement income
- Social Security benefits
- Unemployment benefits
- Alimony
- Pay received for work while in prison
3. Investment income can disqualify you
In 2020, income derived from investments disqualifies you if it is greater than $3,650 in one year, including income from stock dividends, rental properties or inheritance.
4. Eligibility fluctuates
Taxpayers should pay attention to their EITC eligibility every filing year as tax laws and personal tax situations can change. Changes that could affect your eligibility for the EITC can include
- a new job,
- unemployment,
- loss of an annual bonus,
- a change in marital status, or
- a change in a spouse's employment situation.
5. Tax software can help
Electronic tax programs offer an advantage over traditional pen and paper tax preparation because, as long as you enter your information accurately, they ensure that you receive the tax benefits you deserve.
Because the EITC is one of the most lucrative credits available to struggling Americans, filers should consider using a qualified tax software system like TurboTax to maximize the earned income credit.
