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IRS updates 2021 EITC amounts changed by COVID relief law

Family eligible for EITC

The American Rescue Plan Act (ARPA) that became law in March gets most attention for creating a third round of COVID-19 economic impact payments.

But it also made changes to some tax laws to help put more money into families' hands. One of those changes was bulking up the Earned Income Tax Credit, or EITC, for tax year 2021.

Quick EITC history: The EITC has been in the tax code since 1975. It was created as an outgrowth of President Lyndon B. Johnson's War on Poverty as a way to help middle- and lower-income workers.

Even though the EITC can provide eligible taxpayers with potentially thousands of extra dollars, many don't even know about this tax credit.

That's too bad. They are leaving money, lots of it in many cases, on the table.

Not only is this tax break a tax credit, which directly reduces any tax you might owe, it is a refundable credit. That means if you have credit left over after it erases your tax bill, you get the excess back as a refund.

Basically, it's free money.

That alone should be enough to encourage taxpayers to at least check into whether they can claim the EITC.

And now, since so many are facing new and increasingly difficult financial challenges because of the coronavirus pandemic, the ARPA has been enhanced for this tax year.

Adjusted inflation adjustments: The EITC, like many other tax provisions, is affected by the cost of living. Every year, the Internal Revenue Service issues inflation adjustments for they many and myriad affected areas of the tax code.

The EITC adjustments for the 2021 tax year were announced last October. You can find those changes in Part 4 of the ol' blog's 2021 tax inflation series.

Today, the IRS tweaked those amounts, via the release of the changes in Revenue Procedure 2021-23, to reflect the American Rescue Plan Act enhancements to the EITC.

The most notable change to the EITC amounts is for taxpayers without children. Yes, although this tax break does help families, it's also available to those who don't have kids.

Now eligible child-free taxpayers can get a maximum credit of up to $1,502. This new ARPA maximum EITC is substantially more than the $543 previously allowed in 2021 for those without any qualifying children.

The previously announced 2021 EITC maximums for 2021 for other size families remain the same under ARPA. They are:

  • $6,728 for taxpayers filing jointly who have three or more qualifying children,
  • $5,980 with two qualifying children, and
  • $3,618 with one qualifying child.

Earnings amounts, phaseouts tweaked: As the tax credit's name indicates, you must have earned income to qualify. This is money paid to you for work. And you must walk a fine earnings line.

If your job doesn't pay you very much, you can't claim the EITC. Making more is good, but then your credit amount is reduced. And if you make what is deemed too much (yes, that's really a thing when it comes to taxes), you can't claim the EITC at all.

To get any EITC under the new ARPA inflation adjustments for the 2021 tax year, you must make at least the following amounts based on your family size:

  • $9,820 and have no qualifying children,
  • $10,640 with one qualifying child
  • $14,950 with two qualifying children, and
  • $14,950 with three or more qualifying children.

As you earn more, your EITC amounts is reduced. Its starts being phased out 2021 under the ARPA adjustments if your earned and adjusted gross income (AGI) is more than the following amounts:

Filing Status

No
Children

1
Child

2
Children

3 or More Children

Single,
Head of Household
or Surviving Spouse

$11,610

$19,520

$19,520

$19,520

Married
Filing Jointly

$17,560

$25,470

$25,470

$25,470


And at the other far end of the EITC earnings spectrum, you are not eligible for any credit in 2021 under the ARPA adjustments if your earned and adjusted gross income (AGI) is more than the following amounts:

Filing Status

No
Children

1
Child

2
Children

3 or More Children

Single,
Head of Household
or Surviving Spouse

$21,430

$42,158

$47,915

$51,464

Married
Filing Jointly

$27,380

$48,108

$53,865

$56,414


In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. Before the changes, that unearned income limit was $3,650. Under ARPA, it's now $10,000.

Individual age changes, too: In addition to opening up the EITC in 2021 for filers with no children, ARPA also tweaked the age restriction for these non-parents.

For 2021, instead of being age 25 in order to claim the EITC, you now generally must be at least age 19 as of the end of this year. Also, there no longer is an upper age limit, which was 64 under the pre-ARPA rules.

The minimum age for certain students is 24 for 2021. Qualified former foster youth filers or a qualified homeless young person claiming the EITC in 2021 now has an 18 minimum.

2021, not 2020 returns: Essentially, the American Rescue Plan Act made more EITC available to more taxpayers in two family categories, those who don't have any children and those who have larger families.

Remember, these just-announced, pandemic-prompted new inflation adjustments are for the COVID-affected 2021 tax year. Those returns will be filed in 2022.

If you're still working on your 2020 tax year return that's due by May 17 and are eligible for the EITC, your tax preparer or tax software will figure your amounts.

You also can use the IRS' online EITC Assistant to find out if you qualify. This online tool not only helps you determine whether you qualify based on your tax specifics, but also estimates the amount of the credit you could get. And if in using the online tool you find that you aren't eligible, it explains why.

Or you can, of course, check out the previously mentioned post on inflation effects to popular tax credits. In addition to the original 2021 cost-of-living changes, that post has the 2020 EITC amounts and earnings limits for comparison purposes.

You also might find these items of interest:

 

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