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Earned Income Tax Credit

The Earned Income Tax Credit (EITC) reduces tax bills for low-to-moderate-income working families. It’s a tax credit that ranges from $538 to $6,660 for the 2020 tax year depending on your filing status, number of children and earned income. Taxpayers often work with a financial advisor to guide them through claiming different types of credits. Let’s take a look at how the EITC works and how you can qualify and file for it.

History of the Earned Income Tax Credit (EITC)?

Tax credits reduce your tax burden dollar for dollar. Typically, these tax breaks are designed to benefit specific groups of taxpayers.

The EITC, was introduced in 1975 to provide temporary tax relief to the working poor who had to pay Social Security taxes amid increases in the cost of energy and food. Three years later, it became a permanent tax break under the Revenue Act of 1978. Over the years, the EITC has been expanded and altered in order to reduce poverty and encourage low-income individuals to find work.

It’s also refundable, so you can increase your refund even if the credit reduces your tax bill to zero. According to a 2020 report from the Congressional Research Service, 17% of all taxpayers (26.5 million) received $64.9 billion in 2018, making it “the largest need-tested antipoverty program that provides cash for benefits.”

The Congressional Research Service says that families with children got 97% of the 2018 EITC money, with a greater share filed in some southern states when compared with other parts of the country. Families with three or more qualifying children will get a maximum credit of $6,660 for the 2020 tax year ($6,728 for 2021).

How the EITC Works

Earned Income Tax Credit

The EITC offers a subsidy to low- and moderate-income Americans and their families. The amount that each worker qualifies for depends on various factors, including their earned income, adjusted gross income, filing status and whether or not they have a qualifying child. Under the EITC program, workers with qualifying children tend to receive bigger tax credits than those without kids.

For tax year 2020, the maximum credit amounts for individuals without qualifying children are $538. For working families with at least three qualifying children, the maximum credit amount is $6,660 for tax year 2020. (Note: the deadline to file for tax year 2020 is now May 17, 2021.)

Qualifying for the Earned Income Tax Credit

In order to qualify for the EITC, you’ll need to meet certain rules. For one thing, you’ll need to have earned income, or taxable income from working for a company, running a farm or owning a small business. You cannot claim the tax credit if you don’t have a Social Security number or you’re married and you’re filing a separate tax return.

You’re also ineligible for the EITC on your 2020 taxes if you have more than $3,650 in investment income and your adjusted gross income exceeds a certain threshold.

For tax year 2020, you cannot claim the tax credit if you are married filing separately and your adjusted gross income exceeds $15,820. The table below offers a more complete breakdown of the EITC income limits depending on your filing status and how many qualifying children you’re claiming.

  Earned Income Tax Credit Rules for Tax Year 2020 (Due May 15, 2021)
Number of Children Maximum Earnings for Singles and Heads of Household Maximum Earnings for Joint Filers Maximum EITC
0 $15,820 $21,710  $538
1 $41,756 $47,646  $3,584
2 $47,440 $53,330  $5,920
3+ $50,954 $56,844  $6,660

And for a comparison, this table offers a complete breakdown of the EITC income limits based on filing status and the number of qualifying children that you will claim for tax year 2021.

  Earned Income Tax Credit Rules for Tax Year 2021 (Due April 15, 2022)
Number of Children Maximum Earnings for Singles and Heads of Household Maximum Earnings for Joint Filers Maximum EITC
0 $15,980 $21,920  $543
1 $42,158 $48,108  $3,618
2 $47,915 $53,865  $5,980
3+ $51,464 $57,414  $6,728

While having more children can increase the size of the credit you’re eligible for, your kids will have to meet a series of benchmarks if you want to claim them under the EITC program. Unless your children are completely disabled, they can only be considered qualifying children if they’re under the age of 19 by the end of the tax year or they’re full-time students under the age of 24. Your children must live in your home for more than six months out of the year and must be related to you (i.e. the child is your son, nephew, grandchild or foster child).

Finally, if you have a child who’s married, they can only be a qualified child if they’re not filing a joint tax return (or they are only filing a joint tax return in order to get a tax refund). If you don’t have any qualifying children, you may be eligible for the EITC if you’re between the ages of 25 and 64 and no one else can claim you as a dependent. Special rules apply for disabled individuals, ministers, clergy members and members of the military.

Those who qualify for the EITC may also be able to get additional savings from the Child Tax Credit.

Claiming the Earned Income Tax Credit

Earned Income Tax Credit

If a worker wants to take advantage of the EITC, they must file taxes and have earned some income to claim the credit. Keep in mind that workers cannot claim the EITC if they file Form 2555 for foreign earned income, or Form 2555-EZ for foreign earned income exclusions. Applicants must U.S. citizens or residents, and have a valid social security number issued on or before their tax return due date.

To estimate the amount of your credit, you can use the worksheets included with the instructions for Forms 1040. If you need assistance, you can use the EITC assistant provided by the IRS.

The Bottom Line

The earned income tax credit offers working individuals and families an incentive if their income falls below the thresholds set by the IRS. Before claiming the credit, it’s important to ensure that you meet all of the qualifications and double-check that the information you’re providing on your tax return is accurate. To help you claim all of the credits and deductions that you qualify for, it’s a good idea to choose a good tax filing service. A good service will walk you through the filing process and get you the maximum refund available to you.

Tips on Lowering Your Tax Liability 

  • There are plenty of tax credits and deductions you may not even be aware of. A financial advisor can help you find them to minimize your tax burden each year. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
  • You can also make filing taxes easier by using one of the many software options out there. To help you find the right one, we published a report on the best tax software available.
  • If you want to figure out how much you will likely pay in income taxes, SmartAsset’s free income tax calculator can help you plan ahead.

Photo credit: ©iStock.com/mixetto, ©iStock.com/gradyreese, ©iStock.com/FatCamera

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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