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EITC claiming option: use 2019 or 2020 income

Family eligible for EITC

The Earned Income Tax Credit (EITC) is the federal government's largest refundable federal income tax credit for low- to moderate-income workers. In 2020, more than 25 million taxpayers received over $62 billion in EITC. The average EITC amount received last year was $2,461 per return.

The EITC also is regularly overlooked. The Internal Revenue Service estimates that one of five eligible taxpayers do not claim the credit.

That oversight could change this filing season.

The COVID-19 pandemic pushed millions of American workers into lower income brackets last year as their work was reduced. That could make them eligible for this tax break when they file their 2020 tax returns.

COVID's 2020 complications: Those who faced even direr coronavirus consequences also could get some added EITC help this filing season.

To qualify for this tax credit, you must have earned income, but not too much. The goal is to legally hit the EITC earnings sweet spot where you can get the maximum credit amount. Lots of workers in 2020, however, saw most of their income evaporate, meaning that they won't get as much EITC.

The coronavirus relief measure enacted in late December offers them a way around that earning obstacle.

That law says people who lost or changed jobs last year due to the pandemic can use their larger 2019 earned income amount to claim the EITC on their 2020 tax returns.

This filing choice is new for the pandemic, but the option to use a prior tax year's income in figuring a tax break has been used before to help folks dealing with disasters. And if COVID-19 isn't a national disaster, I don't know what is. Congress obviously agreed.

Evolving EITC: Today, Jan. 29, is the IRS' 15th Annual EITC Awareness Day, making it the perfect time to look at this filing season's changes in connection with the credit, as well as its history.

Eitc awareness day jan 29 2021 irs graphic
Did you miss the live EITC Day chat on Twitter? No worries. Just use the hashtag #EITCDay to review the conversation.

The EITC first appeared in the tax code in 1975 as part of that year's Tax Reduction Act. It was an outgrowth of the 1960s-era War on Poverty, creating a way for lower-paid workers to offset the Social Security taxes that take a relatively big bite out of their smaller paychecks.

"For more than 45 years, this tax credit has been helping hard-working Americans and their families," said IRS Commissioner Chuck Rettig. "We want to thank our partners around the country who help us reach out to those low- and moderate-income people who may qualify and not even know about it."

The EITC is particularly valuable because it's a tax credit. Unlike tax deductions that reduce the amount of money that's subject to tax, credits reduce your actual tax liability dollar-for-dollar.

Even better, the EITC is a refundable credit. As that description indicates, it goes beyond just wiping out any tax you owe. It can create a refund for EITC eligible filers.

Relief for all size families: Your annual income, as well as your filing status and family size also affect your ultimate EITC amount.

The EITC is often touted as one of the most family-friendly parts of the tax code. And it is true that eligible taxpayer with larger families do get more EITC money. For the 2020 tax year, EITC-eligible families with three or more qualifying children could receive a credit of up to $6,660.

But the EITC also is available for folks who are child-free. A single taxpayer without any children could get an EITC of $538.

Here's the full range of 2020 tax year EITC maximum amounts based on family size:

  • $6,660 for taxpayers filing jointly who have three or more qualifying children,
  • $5,920 with two qualifying children,
  • $3,584 with one qualifying child and
  • $538 if you don't have any qualifying children.

Work required: Of course, the key to the EITC comes from the first word in the tax break's name, earned. As noted earlier, you must make money from work to claim the EITC.

That's why lawmakers made the change in the second COVID-19 relief package to allow taxpayers to choose between their 2019 or 2020 earned income when claiming the EITC. This option may help workers who earned less in 2020, or who received unemployment income instead of their regular wages last year, get bigger tax credits and larger refunds from their upcoming filings.

Those earnings, though, must fall within the tax credit's earnings' guidelines. If you don't make enough you can't claim it. Make more, and the credit amount is reduced. And if you make what is deemed too much, you can't claim the EITC at all.

For the 2020 tax year, your earned and adjusted gross income (AGI) each must be less than the following amounts in order to claim any EITC amount:

 Filing Status

     No
Children

1 Child

2 Children

3 or More Children

 Single, 
 Head of Household 
 or Surviving Spouse

$15,820

$41,756

$47,440

$50,954

 Married 
 Filing Jointly

$21,710

$47,646

$53,330

$56,844


In addition, if you have what the IRS deems is "excessive" investment (aka unearned) income, you're not eligible for the EITC. For 2020, that investment amount is $3,650.

Note, too, that in this tax time of COVID-19, any economic impact payment amount you got last year is not taxable. That means the money is not counted as income for purposes of claiming the EITC.

Determining your EITC eligibility: Before you get to filling out your tax return, the IRS has a quick way to see if you're eligible for the EITC. It's the agency's EITC Assistant.

This online tool is available in English and Spanish. In addition to helping taxpayers find out if they are EITC eligible, it provides help regarding claims in which dependent children are involved and gives you an idea of how much credit you can claim.

And if you find out that you don't qualify for the EITC, the online tool explains why.

Claiming the EITC: OK, you can claim the EITC. You'll do that directly on Form 1040. It's line 27 on the second page of the individual tax return that was revised for the 2020 filing season.

Form 1040 EITC claim_page 2 line 27

So what amount goes on line 27? You figure out that amount using one of the worksheets in the Form 1040 instructions (on pages 45-47). Leading up to the worksheets are four pages of instructions, which include several questions you need to answer before you get to one of the worksheets.

The worksheets then are followed by nine more pages of EITC tables. Yes, this is one of the reasons tax software was created.

Also, if you have children that you are using in connection with your EITC claim, you'll also have to fill out Schedule EIC. That's an excerpt from this two-page form below.

IRS Schedule EIC page 1 excerpt

Form 1040 has made it into an earlier collection of tax forms here on the ol' blog. Today's mention of Schedule EIC earns that form a spot on the new Tax Forms Fiesta! page.

Child tax credit, too: The second page of Schedule EIC also has a flow chart you can use to see if you're eligible to also take the additional child tax credit (ACTC) for a dependent youngster.

The ACTC is a topic for a whole 'nother post, but it also brings me to one final point about choosing 2019 or 2020 income.

The same tax year income shifting option to get a better EITC result also is available for parents who can claim the ACTC.

Get EITC (and more) help: Both of these tax credits can be complicated, even when you use the IRS online tools or tax software. If you're eligible to claim the EITC, you likely qualify to use Free File to complete your return.

If you find you're overwhelmed in trying to figure out the EITC (or ACTC) on your own or using a tax preparation program, get person-to-person — still abiding by coronavirus distancing guidelines, of course — help.

Hire a tax professional to help you sort through your EITC and other issues. You might want to start that process now, as there are many other complex COVID-related rules that tax pros are working on this filing season for other clients.

EITC other requirements

Also check into the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) program in your area. These sites nationwide are staffed by tax-savvy, IRS-trained volunteers who help lower-income and older taxpayers fulfill their annual filing responsibilities.

Many VITA and TCE locations still are operating by appointment only or remotely due to COVID-19, but they still can help. You can find a site and its hours by using the online VITA/TCE Locator Tool, the IRS smartphone app IRS2Go, or by calling toll-free (800) 906-9887.

EITC fraud delays, possible penalties: The EITC (and ACTC) also have been targeted as potential tax fraud areas. To give the IRS more time to catch false claims by unscrupulous or sloppy tax preparers and taxpayers, tax law mandates delays in processing all returns claiming these two credits to ensure they are legitimate.

Refunds for returns where the EITC (or ACTC) is claimed cannot be issued before mid-February. Since the IRS won't start processing returns this year until Feb. 12, the IRS says refunds from these returns won't be delivered until the first week of March, presuming there are no other issues with the filings.

That's when the refund money will show up in bank accounts or on debit cards where taxpayers have chosen direct deposit. The hold applies to the entire refund, not just the portion associated with the EITC.

And if you try to skirt the rules, beware. Tax law also provides for penalties in connection with false claims.

The IRS says if your incorrect EITC entry "is due to reckless or intentional disregard of the rules," you won't be allowed to take the credit for two years. The claiming ban is 10 years if you flat-out cheat in your EITC claim. Plus, you also could face financial penalties.

You also might find these items of interest:

 

Coronavirus Caveat & More Information
In 2021, we all still are dealing with extraordinary circumstances,,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.

But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.

 

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