Send me real-time posts from this site at my email
Motley Fool

What Is the Earned Income Tax Credit?

Taxes are a huge burden for Americans of all income levels, but they can be even more problematic for lower earners who need every dollar they can get their hands on. Thankfully, the IRS has made one extremely lucrative tax credit available to low-income households. It's called the Earned Income Tax Credit, or EITC, and it could put serious cash back in your pocket.

How tax credits work

A tax credit is a dollar-for-dollar reduction of your tax liability. If you owe the IRS $1,000 and claim a $1,000 tax credit, you wipe out that $1,000 you owe. Some tax credits are non-refundable, so the most they can do is reduce your tax liability to $0. But refundable tax credits will pay you money even if you owe nothing.

Image source: Getty Images.

How the EITC works

The EITC is a refundable tax credit that will pay you money even if you don't owe any taxes. To claim the EITC, you must file a tax return -- even if your earnings are low enough that you're not required to do so. You must also have some earned income. And, your tax-filing status must be single, married filing jointly, head of household, or qualifying widow. If you're married filing a separate tax return, you won't qualify.

EITC income limits and value for 2020

Eligibility for the EITC depends on your income combined with the number of qualifying children you have in your household. Here's what those thresholds look like for the 2020 tax year (meaning, the tax return you'll file in ):

Tax Filing Status

No Qualifying Children

1 Qualifying Child

2 Qualifying Children

3 or More Qualifying Children

Single, head of household, or widowed

$15,820

$41,756

$47,440

$50,954

Married filing jointly

$21,710

$47,646

$53,330

$56,844

Data source: IRS.

Meanwhile, the EITC's value will hinge on the number of qualifying children in your household. For the 2020 tax year, here's what the EITC could be worth to you:

Number of Qualifying Children

Maximum EITC Value

0

$538

1

$3,584

2

$5,920

3 or more

$6,660

Data source: IRS.

EITC income limits and value for 2021

The income limits for the EITC tend to change from year to year. Here's what they look like for the 2021 tax year (for which you'll file a return in 2022):

Tax Filing Status

No Qualifying Children

1 Qualifying Child

2 Qualifying Children

3 or More Qualifying Children

Single, head of household, or widowed

$15,980

$42,158

$47,915

$51,464

Married filing jointly

$21,920

$48,108

$53,865

$57,414

Data source: IRS.

Meanwhile, for the 2021 tax year, here's what the EITC could be worth to you:

Number of Qualifying Children

Maximum EITC Value

0

$543

1

$3,618

2

$5,980

3 or more

$6,728

Data source: IRS.

The EITC and tax fraud

Unfortunately, the EITC has been the subject of tax fraud in the past, and so the IRS takes steps to safeguard against that. As such, filers who claim the EITC early on in the tax-filing season are generally subject to tax refund delays. But that's not a reason to not claim it. If you're entitled to the EITC, you could be in line for a nice, fat check from the IRS, so even if you normally don't file a tax return, it pays to see if doing so makes sense for you. If you're a lower earner, you'll generally be eligible to use the IRS's Free File service so your taxes don't cost you a dime.

10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of 2/1/20

The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue