In tax season, the only thing better than a tax deduction is a tax credit. And if you have low to moderate income, the Earned Income Tax Credit (EITC) is a very good thing indeed.
A deduction lowers your taxable income, which, in turn, reduces your taxes. A tax credit, however, reduces the amount of tax you owe, dollar for dollar. If you owe $700 in taxes and get a $500 tax credit, your tax bill will shrink to $200.
The EITC is a refundable tax credit, which means that you get the full credit, even if the credit is larger than the amount of tax you owe for the year. If you owed no income tax and had a $500 EITC, for example, you’d get a $500 refund.
As its name implies, you need to have earned income to get the EITC. Earned income is money you get from working for someone else, yourself or a business you own. Alimony, interest and dividends, pension payments or Social Security benefits don’t count.
Also, you must:
- Have investment income of less than $10,000 in the 2021 tax year
- Have a valid Social Security number
- Be a U.S. citizen or resident alien for the entire year
If you don’t have dependent children, you must have lived in the U.S. for at least half of the 2021 tax year, and you can’t be claimed as a dependent on anyone else’s tax return.
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The American Rescue Plan of 2021 widened EITC eligibility significantly for tax year 2021. It removed the age cap for the credit, so people 65 and older can now get the credit. It also decreased the minimum age for the credit to 19 from 25. (The minimum age for students is 24 and for former foster children is 18.)
The bill also raised the maximum EITC that taxpayers without dependents can claim from $543 to $1,502 for the 2021 tax year. In addition, the maximum income you can have to claim the credit has risen. The table shows the income ceilings for EITC eligibility for the 2021 tax year.
|2021 Tax Year EITC Maximum Adjusted Gross Income (AGI)|
|How many children, relatives claimed||Single, Head of Household, Widowed, Married/file separately||Married/filing jointly|
To claim the EITC, you have to file a tax return, using Form 1040 or 1040SR. You can also file for the EITC for the past three years by filing an amended return.
Be sure to see if your state offers its own version of the EITC. In addition to the federal tax credit, 22 states base their own earned income tax benefit on the federal one.
In the 2022 tax year, some provisions of the EITC will return to their 2020 rules — in particular, the ability for people 65 and older to claim the credit. AARP is pushing to make those changes permanent.
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.