For many, 2020 proved to be a “lost year.” Especially financially speaking.
Employment income among wage-earners was down almost universally. And those in the middle and lower-income brackets were among the hardest hit.
That said, there’s a built-in tax credit that specifically addresses folks in this position.
It’s called the Earned Income Tax Credit (EITC). And the EITC could result in a very tidy tax refund for those who qualify. In fact, your refund could even amount to more than what you actually paid in taxes
Which begs the question… Who qualifies for the EITC + what’s the potential refund?
Let’s take a closer look…
What is the Earned Income Tax Credit (EITC)?
EITC is a tax credit aimed at low-to-lower-mid-income wage earners. In particular, this credit is intended to aid families with children.
Most importantly, this is a refundable credit. This means, regardless of whether you owe income taxes, you may qualify for this credit. And if you do, it yields a potentially sizable refund.
This can benefit you in two ways…
First, let’s say you owe $5,000 in income taxes. But your EITC credit is $6,000. Now, instead of owing taxes, you can expect a $1,000 refund.
And secondly, let’s say your itemized deductions eliminate any additional income taxes, but you don’t qualify for a refund. Your EITC credit, however, is $1,000. You can now expect a $1,000 refund.
And in either case, you’re eligible for the refund no matter how much you paid in taxes.
If You Qualify for the EITC, How Large of a Refund Can You Expect to Receive?
Ultimately, the amount of the credit depends on your total income and the number of qualifying children in your household.
For example, let’s say you’re married (filing taxes jointly), have three children, and earned less than $56,000. You qualify for a $6,600 credit.
In another example, let’s you’re single with no children, and earned less than $21,000. You qualify for a $538 credit.
The chart below further illustrates the full range of potential earned income credits…
Who Qualifies For the EITC?
There are some basic qualifiers, and a few important details worth highlighting. Let’s take a look at both…
Basic EITC Qualifications…
- Your earned income must be at least $1 (and before you ask, neither pension payments nor unemployment benefits count toward your “earned income”).
- Your investment income must be less than $3,650.
- If you’re married, you must be filing jointly (married couples filing separately are exempted).
- If you file a Form 2555 or Form 2555-EZ (which calculates foreign earned income), you’re exempted.
Additional EITC Qualification Details
- Both your earned income and adjusted gross income must meet the qualifying thresholds.
- You can claim up to three children.
- Qualifying children include biological, adopted, step, foster, and grandchildren.
- Qualifying children must be under 19 years of age.
- Qualifying children must have lived in your household for more than six months.
- To claim a child, you must submit their social security number and date of birth.
- You must reside within the country for more than six months out of the year.
- You’re exempt if someone is claiming you as dependent on their tax return.
- Age is a factor — You must be at least 25 years of age, and no older than 65 years of age to qualify.
Wondering if You Qualify For The EITC?
If your income was squashed by the pandemic, you may qualify for the EITC. If you want to find out more, let’s chat!