What's The EITC (Earned Income Tax Credit) ?

Date: July 17, 2021

The EITC (Earned Income Tax Credit) is a tax credit that is given to people who

Ask yourself one question the next time you're complaining about your tax burden or the size of your refund (or lack thereof): Do I qualify for the Earned Income Tax Credit?

The EITC (Earned Income Tax Credit) is a tax credit offered to low-income working Americans. It was created with the goal of keeping individuals and families out of poverty while also encouraging them to work. It also works! In 2018, the EITC was credited with helping 5.6 million Americans, including 3 million children, get out of poverty [source: CBPP]. An estimated 25 million Americans will receive an EITC worth $62 billion in 2020 [source: IRS]. However, not everyone who qualifies for the EITC takes advantage of this valuable benefit, potentially leaving thousands of dollars on the table.

To be eligible for the EITC, you must earn a small amount of money in relation to the size of your household. The maximum amount of earned income you can declare for the 2020 tax year is $56,844 if you're married and filing jointly, or $43,998 if you're single - and that's only if you have three or more children. If you have fewer or no children to support, your income cap is reduced. To qualify for the EITC, you must earn less than $15,820 if you are single and have no children [source: IRS].

The 1975 Tax Reduction Act established the EITC. It was created with the intention of benefiting low-income families with children by providing a completely refundable tax credit. What does "100% refundable" imply? The EITC, like the Child Tax Credit, can bring a taxpayer's tax liability below zero and result in a refund [source: Tax Policy Center]. And if you owe no income tax at all — which is the case for many low-income families — you get to retain the entire EITC. The EITC, unlike other so-called "welfare" programmes, encourages employment by requiring a certain amount of earned income. In actuality, the credit amount rises with income until it reaches a specific point, beyond which it begins to decline or "phase out." If you earn between $15,000 and $25,000 in 2020, for example, and you're a married couple with three children, you'll get the maximum tax credit. Your tax credit will diminish for every dollar you earn over $25,000 [source: IRS].

The EITC, like any other IRS programme, has a large number of complicated rules, limits, and rate tables. To dispel some of the ambiguity, we'll start by defining who is eligible for the EITC and who isn't.

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