All About the Earned Income Tax Credit

Bob Edwards:

Hello. I'm Bob Edwards with an AARP Take on Today. The tax filing deadline is fast approaching, and there's a new benefit for the 2.8 million adults over age 65. It's the Earned Income Tax Credit, or EITC. Those who qualify could receive up to $1,500 on their federal return when they file their taxes. Here to discuss everything you need to know about the benefit is Jackie Lynn Coleman. She is a director at AARP Foundation who helps lead the team on expanding access to tax benefits for older adults who are living on low income.

Jackie Lynn Coleman:

The Earned Income Tax Credit is one of the, or the biggest, poverty reduction tax credit that is available. The EITC is a tax credit that may give you money back at tax time, or lower the federal taxes you owe. You can claim the credit whether you're single or married, or have children or not. The main requirement is that you must earn money from work. The credit can eliminate any federal tax you owe at tax time. If the EITC amount is more than what you owe in taxes, you get the money back in your tax refund.

Bob Edwards:

In other words, if you owe taxes when you file, you can still receive a refund if the EITC is greater than what you owe.

Jackie Lynn Coleman:

The beauty of the EITC is that it is refundable if you qualify for the credit. You can still receive a refund even if you don't owe income tax. In 2021, the credit is worth up to $6,728 for taxpayers with children that qualify and have earned $57,414 or less. For taxpayers who work but do not have children, they may qualify for up you $1,502 if their earned income is $27,380 or less. The credit amount rises with earned income until it reaches a maximum amount, then gradually phases out.

Bob Edwards:

You should also know that families with more children are eligible for a higher credit.

Jackie Lynn Coleman:

For those with children trying to determine if their children qualify for the EITC, there are three tests to qualify. One, relationship. The child must be your son, daughter, grandchild, stepson, or adopted child, a younger sibling, step-sibling, half sibling, or their descendant, or even a foster child placed with you by a government agency. Secondly is age. The child must be under 19, under 24 if a full-time student, or any age if totally or permanently disabled. Third, residency. The child must live with you in the US for more than half of the year. Time living together doesn't have to be consecutive. Beyond the federal EITC, 29 states and the District of Columbia have adopted state EITCs. Taxpayers can check the IRS website to see if their state offers a state EITC.

Bob Edwards:

The changes in the Earned Income Tax Credit came from the American Rescue Plan, which was signed into law in March of 2021. We've already mentioned that it has become available for people who are 65 and older with no dependents, but that's not the only improvement.

Jackie Lynn Coleman:

For 2021 only more childless workers and couples can qualify for the EITC. That's because the maximum credit is nearly tripled for these taxpayers. In 2021, the maximum EITC for those who have no dependents is $1,502 up from $538 in 2020, available to taxpayer filers with an AGI below $27,380 in 2021.

Bob Edwards:

A quick side note, your AGI, or adjusted gross income, is calculated by subtracting certain expenses from your gross income, such as business expenses or student loan interest payments.

Jackie Lynn Coleman:

Another change is available for both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it is higher than their 2021 income. In some instances, this option will give them a larger credit. Further, some EITC changes for 2021 and beyond included singles and couples who have social security numbers can claim the credit, even if their child or children don't have social security numbers. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn't qualify for the credit at all. More workers and working families who also have investment income can get the credit. Starting in 2021, the limits on investment income is increased to $10,000. After 2021, the $10,000 limit is indexed for inflation, with the 2022 limit rising to $10,300.

Bob Edwards:

If you were unaware of the Earned Income Tax Credit, you're not alone. AARP Foundation, which runs the popular Tax-Aide service every year, says that about 20% of eligible adults do not claim the EITC. Their staff and volunteers have been spreading the word, leveraging $103 million in federal earned income tax credits.

Jackie Lynn Coleman:

When we just look at those 65 and older, $38 million in EITC refunds were leveraged. To put this into context, last year, taxpayers 65 and older that were served by Tax-Aide collectively only leveraged $7.2 million. As you heard, the expansion of the EITC is making a significant difference for older adults, which is why the expansion of the EITC needs to go beyond the 2021 tax year.

Bob Edwards:

Other than the tax credit, what should older adults look out for when doing their taxes this year?

Jackie Lynn Coleman:

Well, what we know is that every taxpayer and every family structure is different, so it's important to raise a few other tax updates for this tax season. Eligible people who didn't receive the third round of the economic impact payments, or who didn't receive the full amount, may reclaim the recovery rebate credit when they file this year. The tax law included a third round of economic impact payments that went out to eligible Americans throughout 2021. These payments were generally equal to $1,400 per person. Another tax benefit that folks should look out for includes the charity deduction for taxpayers who take the standard deduction. A temporary law change allows more taxpayers to easily deduct up to $600 in cash donations to qualifying charities on their 2021 federal income tax return. Ordinarily, nine in 10 taxpayers now take that standard deduction rather than itemizing, so it is essential that taxpayers who have made monetary contributions remember to take advantage of this deduction if they qualify.

            Another is the increase with the Child Tax Credits. The American Rescue Plan Act of 2021 increased the amount of families that can claim for Child Tax Credits. The 2021 amounts are $3,600 per child under age six, and $3,000 per child for ages six to 17. This compares with $2,000 per child underage previously. Like the EITC, the Child Tax Credit also has income thresholds that must be met to qualify. Then lastly, but very importantly, and we've seen this a lot in the news lately, that there has been certain student loan forgiveness that is now tax free from 2021 to 2025. The IRS has done a lot of leg work by informing lenders that they should not issue cancellation of debt for loans discharged during this time period. Those are some of the top other areas in terms of tax law that has changed and would benefit those that are older adults.

Bob Edwards:

What other resources are available for people who need help filing?

Jackie Lynn Coleman:

One of the AARP Foundation's key program, as you know, is Tax-Aide, which is powered by 25,000 volunteers supporting 3,500 free tax preparation sites across the US. All sites require an appointment, and there is a suite of service models offered, including virtual drop off and our traditional in-person model. While we are wrapping up the season, there may be appointments still available in your area. We ask taxpayers to visit aarpfoundation.org/earnings, where they can find a site in their community by using our site locator. Or there is an option to file on your own using one of the free tax softwares provided by the Internal Revenue Service.

            Also, taxpayers can contact our contact center at 1 (866) 305-1913, where you can find a site near you. We also launched a Tax-Aide bot this year, which taxpayers are welcome to ask any questions related to taxes or where they can find a tax site near them. Finally, if they have an additional tax question or only a tax question, we also provide online tax assistance where IRS certified volunteers are eager to address their questions. Additionally, the IRS has a number of other community VITA and TCE sites that are available and open to provide tax filing services. All of these resources can be found on aarpfoundation.org/earnings.

Bob Edwards:

Anything else you'd like to mention?

Jackie Lynn Coleman:

Yes. The tax season is coming to a close soon, so remember to file your tax return by or before April the 18th. If you do not believe you will be able to make that deadline, remember to file an extension of time with the Internal Revenue Service.

Bob Edwards:

Jackie Lynn Coleman is a director at AARP Foundation. Thank you.

Jackie Lynn Coleman:

Thank you.

Bob Edwards:

For further information about taxes, visit aarp.org/taxes. You can find more resources in the show notes. That's it for this week. If you enjoyed this episode, please let us know by emailing us at newspodcast@aarp.org to our news team, producers Colby Nelson and Danny [Allercomb 00:11:42], engineer Julio Gonzalez, executive producer Jason Young, and my co-hosts Wilma [Consel 00:11:49] and Mike Ellison. Become a subscriber on Spotify, Apple Podcast, Stitcher, or other apps, and be sure to rate our show as well. For an AARP Take on Today, I'm Bob Edwards. Thank you for listening.