What Is the Earned Income Tax Credit (EITC)? – SmartAsset

The earned Income Tax Credit ( EITC ) reduces tax bills for low-to-moderate-income shape families. It ’ s a tax credit that ranges from $ 1,502 to $ 6,728 for the 2021 tax year depending on your charge condition, total of children and gain income. Taxpayers frequently work with a fiscal adviser to guide them through claiming different types of credits. Let ’ s take a look at how the EITC works, a well as 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 irregular tax relief to the working poor people who had to pay Social Security taxes amid increases in the monetary value of department of energy and food. Three years late, it became a permanent wave 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 employment.

It ’ randomness besides 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 course of study 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 early parts of the state. Families with three or more stipulate children will get a utmost credit of $ 6,728 for the 2021 tax year ( $ 6,935 for the 2022 tax year ).

How the EITC Works

The EITC offers a subsidy to low- and moderate-income Americans and their families. The total that each actor qualifies for depends on assorted factors, including their earned income, adjusted crude income, filing status and whether or not they have a qualify child. Under the EITC program, workers with qualifying children tend to receive bigger tax credits than those without kids. For tax year 2021, the maximum citation amounts for individuals without qualifying children is $ 1,502. For working families with at least three qualifying children, the utmost credit amount is $ 6,728 for tax year 2021. ( note : the deadline to file for tax class 2021 is April 18, 2022. )

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 want to have earned income, or taxable income from working for a ship’s company, running a farm or owning a small business. You can not claim the tax credit if you don ’ t have a Social Security number or you ’ re marry and you ’ re filing a break tax rejoinder. You ’ re besides ineligible for the EITC on your 2021 taxes if you have more than $ 10,000 in investing income ( $ 10,300 in 2022 ) and your adjusted gross income exceeds a certain doorsill.

For tax year 2021, you can not claim the tax credit if you are marry charge individually. The board below offers a more complete dislocation of the EITC income limits depending on your file condition and how many qualifying children you ’ ra claim .

  Earned Income Tax Credit Rules for Tax Year 2021 (Due April 18, 2022)
Number of Children Maximum Earnings for Singles and Heads of Household Maximum Earnings for Joint Filers Maximum EITC
0 $21,430 $27,380  $1,502
1 $42,158 $48,108 $3,618
2 $47,915 $53,865 $5,980
3+ $51,464 $57,414 $6,728

And for a comparison, this table offers a complete dislocation of the EITC income limits based on filing condition and the number of qualifying children that you will claim for tax year 2022 :

  Earned Income Tax Credit Rules for Tax Year 2022 (Due April 15, 2023)
Number of Children Maximum Earnings for Singles and Heads of Household Maximum Earnings for Joint Filers Maximum EITC
0 $16,480 $22,610 $560
1 $43,492 $49,622 $3,733
2 $49,399 $55,529 $6,164
3+ $53,057 $59,187 $6,935

While having more children can increase the size of the credit rating you ’ re eligible for, your kids will have to meet a series of benchmarks if you want to claim them under the EITC course of study. Unless your children are completely disabled, they can only be considered qualifying children if they ’ rhenium under the age of 19 by the conclusion of the tax class or they ’ rhenium full-time students under the age of 24. Your children must live in your base 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 ). ultimately, if you have a child who ’ second married, they can only be a restricted child if they ’ re not filing a articulation tax return ( or they are only filing a articulation tax render in regulate to get a tax refund ). If you don ’ t have any modification 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 pendent. especial rules apply for disable individuals, ministers, clergy members and members of the military. Those who qualify for the EITC may besides be able to get extra savings from the Child Tax Credit.

Claiming the Earned Income Tax Credit

If a proletarian wants to take advantage of the EITC, they must file taxes and have earned some income to claim the citation. Keep in beware that workers can not claim the EITC if they file shape 2555 for extraneous earned income, or Form 2555-EZ for extraneous gain income exclusions. Applicants must be U.S. citizens or residents, and have a valid Social Security phone number issued on or before their tax hark back due date.

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

Bottom Line

The gain Income Tax Credit offers working individuals and families an bonus if their income falls below the thresholds set by the IRS. Before claiming the recognition, it ’ south significant to ensure that you meet all of the qualifications and double-check that the information you ’ ra providing on your tax revert is accurate. To help you claim all of the credits and deductions that you qualify for, it ’ s a effective estimate to choose a good tax filing serve. A good service will walk you through the filing procedure 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. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor 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.

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