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A look at EITC changes on this year's EITC Awareness Day

Family eligible for EITC

Today is EITC Awareness Day!

OK, Jan. 28 isn't an official holiday to celebrate the Earned Income Tax Credit, usually referred to (at least in the tax world) by its acronym EITC.

But it is an annual event promoted by the Internal Revenue Service. Every year in late January, the tax agency focuses on getting the word out about the EITC.

The reason is simple. Millions of individuals regularly overlook the EITC and surrendering thousands of dollars they could use.

The EITC itself, however, is not so easy to claim. That's why a lot of folks ignore it. The IRS estimates that around 20 percent of filers don't claim it.

So the IRS, the Taxpayer Advocate Service, community services organizations, tax groups, state and local governments (many of which offer their own version of the federal EITC), and other interested parties (me!) make it a point today to tout (through social media, too via #EITCDay) this tax break's benefits. 

The info blitz is especially important this year, as there are some changes to the EITC, thanks to the COVID-prompted American Rescue Plan Act (ARPA) enacted last March.

Some EITC revisions are temporary, applying only to the 2021 tax year return you're working on … unless Congress decides to continue them. Others are permanent.

2021-only EITC changes: Let's start with some of the key temporary, tax year 2021 changes to the EITC.

  • More individuals are eligible. Before ARPA, the EITC could be claimed only by taxpayers between the ages 25 to 64. That age range has been expanded for taxpayers who do not have children.

    Taxpayers as young as 19, as long as they are not students, may now claim the EITC. In addition, qualified former foster youth and homeless young people age 18 and who don't have children now may claim the EITC.

    EITC and former foster youth_EITC Day 2022_IRS graphic

    The top age limit also is removed. Also, for 2021, there is no upper age limit on EITC claims.
  • There's a choice of tax year income. The key to the EITC comes from the first word in its title. You must have some earned income to be eligible. Since the coronavirus pandemic messed up a lot of folks' earnings, the ARPA allows EITC claimants to choose to use their pre-COVID 2019 income instead of last year's earnings if the 2019 amount is more. This could mean some individuals will be able to claim a higher EITC amount than if they relied on their TY 2021 income.
  • Income parameters for taxpayers without children are expanded significantly. Every year, the IRS adjusts EITC amounts and earnings levels to which they apply based on inflation. You can see the 2021 and 2022 amounts in Part 4 of the ol' blog's inflation series. But even with the adjustments, the credit amount for taxpayers without kids always is significantly lower.

    For tax year 2021, however, ARPA dramatically bumped up those amounts. This filing season, the EITC is generally available to filers without qualifying children and who made less than $21,430 or less than $27,380 for spouses filing a joint return. The maximum EITC for filers with no kiddos now is $1,502. That's almost triple the $538 allowed these filers in 2020.

EITC changes for 2021 and beyond: ARPA also made some permanent changes to the EITC. Below are some of those key provisions that will be in the Internal Revenue Code this year and afterwards.

  • More investment income is allowed. Since the EITC relies on earned income, it generally frowns on the unearned variety. If you make too much from investments, you won't be eligible for the EITC. But last year's law change now means workers and working families who also have a bit more investment income and still claim the EITC. Starting with the 2021 tax year, the amount of investment income they can receive and still be eligible for the EITC increases to $10,000. In 2020, the limit was $3,650. After 2021, the new $10,000 limit is indexed for inflation.
  • More leeway for unhappily married couples. Previously, married taxpayers had to file with their spouse to claim the EITC. Now, married but separated spouses can choose to be treated as not married for EITC purposes.

    To qualify, the spouse claiming the credit cannot file jointly with the other spouse, must have a qualifying child living with them for more than half the year, and either —
    • have a separate residence form the spouse for at least the last six months out of the year, or
    • be legally separated according to their state law under a written separation agreement or a decree of separate maintenance and not live in the same household as their spouse at the end of the tax year for which the EITC is being claimed.
  • Some Social Security number exceptions for children. Single people and couples with children who have Social Security numbers can claim the credit, even if their children do not 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. The Form 1040 instructions (specifically, for line 27a) have more on how to file for the EITC if your qualifying child doesn't have a valid Social Security number.

How to claim the EITC: To get the EITC, eligible workers must file a tax return and claim the credit using Schedule EIC, an excerpt of which is shown below.

Schedule EIC form 1040 Earned Income Tax Credit 2021
See more tax forms and more about them at Talking Tax Forms!

This also means filing a Form 1040 even if your earnings are below the income requirement that legally require you to file a tax return.

As noted earlier, the EITC is not an easy tax break to claim. But don't let that keep you from getting what you're due.

You can get help filing your tax return and claiming the EITC by using —

Expect EITC refund delays: OK, you're going to claim the EITC this year. Great. But you also need to know that getting your refund will take a bit longer.

Stop cursing the IRS. It's not the agency's fault. By law, the Protecting Americans from Tax Hikes, or PATH, Act enacted back in 2015, the IRS cannot issue refunds before mid-February for tax returns that claim the EITC or the Additional Child Tax Credit (ACTC). 

When it gets tax returns claiming these credits, the IRS must hold the filer's entire refund − even the portion not associated with the EITC or ACTC and, if applicable, the Recovery Rebate Credit, which is the official name of the COVID economic impact payments.

Congress created the law to give the IRS more time to detect and prevent errors and fraud. (See the discussion earlier about finding a trusted tax preparer.)

The IRS says that by Feb. 19, its online refund tracking systems will be updated with projected deposit dates for most early EITC/ACTC refund filers.

So just when those refunds actually will be in taxpayers' hands? The IRS says taking into account weekends and other factors, such as Washington's Birthday federal holiday, most EITC or ACTC related refunds will be available in taxpayer bank accounts or on debit cards by the first week of March, if they choose direct deposit and there are no other issues with their tax return.

Despite this delay, and the complication of applying for the EITC, the tax credit's benefits, especially the 2021 tax year enhancements, make it worth the effort.

The biggest benefit is that in addition to being a tax credit, which directly reduces any tax you might owe, the EITC a refundable credit. That means if you have and EITC credit amount left over after it erases your tax bill, you get the excess back as a refund.

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