The earned income tax credit offers up to $6,660 for qualified filers—yet too many Americans don’t seem to know about it. While 25 million Americans qualify, the IRS says that only 20% of them claim the credit on their federal tax return. Here’s a look at why and whether you’re leaving cash on the table.
How does the earned income tax credit work?
The earned income tax credit (EITC) is primarily designed to provide financial assistance to working families with children. For the tax year 2020, filers can qualify for:
A $6,660 credit if you make less than $56,844 and have three kids. A $538 credit if you’re single, make less than $15,820, and don’t have kids.Note that unemployment income does not count as earned income, so it can’t be included as part of your calculation. For more on EITC eligibility based on family size and income, check out this Nerdwallet post.
The great thing about this particular credit is that it’s refundable, which means that if the credit exceeds the taxes you owe, you get the rest paid out as a refund. Plus, this year, as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, if your earned income was higher in 2019 than in 2020, you can use the 2019 amount to figure out your EITC for 2020. (It’s worth mentioning here that President Biden’s American Rescue Plan proposes a temporary increase the maximum amount allowed to workers without children, from $530 to $1,500, applicable in the 2021 tax year).
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So why don’t more people claim the credit?
Many low-income individuals don’t file income tax returns in the first place, as it’s not required for when you make less than $12,200, so they simply don’t know about it.
Also, the credit might be the most complicated of all the tax credits to calculate, as it uses complicated rules and formulas that aren’t easy to understand. Eligibility is determined by a mix of income type (with a cap on investment income), marital status at the end of the year, citizenship status, and how many kids you have, where they live, and their age. Plus, eligibility can change from year to year.
How to determine if you qualify
The quickest, easiest way to determine eligibility is by using the EITC Assistant on the IRS page. The site takes you step by step through all of the eligibility criteria in the format of a questionnaire, followed by a calculation of how much you might be owed.
Also consider using the IRS’ Free File program, which, in partnership with private tax preparation companies, offers free software that will calculate and process your EITC claim. Of course, if at any point you feel uncomfortable using software to claim credits, it might be worth hiring a tax preparer.
Lastly, consider the Volunteer Income Tax Assistance program, known as VITA, which offers in-person (socially distant) services at various locations throughout the country. Unfortunately, due to COVID, there are fewer locations offering VITA service this year, but you can try to find one near you here.
