$2,500+ Tax Break 20% of Eligible Households Fail to Claim
Earned income tax credit: two kids, up to $5,920; three, up to $6,660
It’s never a good time to overlook a valuable tax break, but in these budget-stressed COVID times, it becomes even more valuable to collect any breaks you’re entitled to. Yet an estimated one in five households that are eligible for the earned income tax credit (EITC) don’t claim it.
And that’s likely a serious chunk of money that is passed up. In the 2018 tax year, the 26.5 million households that did step up and claim the federal EITC received an average benefit of $2,451. (In half the states, residents who qualify for the federal EITC may also be eligible for supplemental state EITC benefits as well.)
Moreover, this isn’t some paper-gain that merely reduces the amount of tax you owe. Uncle Sam will cut you a check even if the EITC is more than the tax you owed.
If you’ve got at least one kid and moderate income, you definitely should take the time to make sure you’re not needlessly passing up a potential windfall courtesy of the EITC. The income limit to be eligible for the EITC is much higher for households with a dependent child than for households without kids. And eligible households with kids can collect a much larger credit than non-kid households.
The IRS has a free online tool that will tell you if you’re eligible, and how big a credit you might be in line for. (A web search of the term “IRS EITC Assistant” will point you to the tool.)
Here’s what it takes for a household to grab the valuable EITC:
The key variable to be eligible is having some earned income, but not too much. Earned income is salary, tips, and any other on-the-job income you earned. If you’re self-employed, the credit is determined by your self-employment income minus half of the Social Security payroll tax you paid for the year. (Investment income — dividends, capital gains, royalties and other passive income — is also checked. In the 2020 tax year, investment income above $3,650 will make you ineligible, regardless of your earned income.)
How much earned income is OK depends on your marital status, whether you have kids, and if you do, how many you have. If you are eligible, the actual size of the credit is dependent on your filing status, the number of kids and where your income falls within the allowable limits.
For the 2020 tax year, a single filer with no dependent kids must have adjusted gross income below $15,820 to qualify for the EITC. Married couples have an income cut-off of $21,710. In both instances the maximum credit for the 2020 tax year is $538. (Note, married couples must file a joint tax return to be eligible for the EITC.)
If you have at least one scoundrel underfoot, you can have much higher income and still qualify for the EITC. About 75% of households that claim the EITC have at least one kid.
For purposes of the EITC, a child must be under 19 at the end of the year you’re applying for the credit, or under age 24 if your child is a full-time student. (There is no age limit for children who are permanently disabled.)
Eligible kids are biological, adopted, stepchildren, foster children and grandchildren, as long as said kid lived with you in the U.S. for more than half the year. Brothers, sisters, half-brothers and half-sisters are also eligible if they are a dependent of the person filing the 1040 tax return.
For a single parent with one child, the income cutoff to be eligible is $41,756 for the current tax year. Married couples with a child are eligible as long as income is below $47,646 in 2020. The maximum benefit is $3,584.
Two kids? If you’re single and have income below $47,400 or married with income below $53,330 you could be eligible for a maximum credit of $5,920.
If you have three or more kids, income eligibility in 2020 is $50,954 for single filers and $56,844 for married couples, with a maximum benefit of $6,660.
Clearly, that’s a lot of money to leave on the table. To collect, you need to file a federal tax return and have a Social Security number for parents and any kids. If you have kids, you want to make sure you fill out Schedule EIC with your federal tax return.
If all this is welcome news, and you’re kicking yourself for not collecting the past few years, there’s more good news. You may be able to collect the EITC for past years, by filing an amended tax return. The IRS website has the info on the earned income limits for tax years going back to 2016. A quick web search for “IRS Earned Income Tax Credit Income Limits and Maximum Amounts” will get you to the info you need.