Understanding the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a federal tax credit that can provide great benefit to families. According to the IRS, in 2019 alone, approximately 25 million workers and families received over $60 billion in EITC payments, with the average payment coming in at $2,476.

The EITC has been around for 46 years and while it has been altered throughout the years, there are still a lot of people that don’t know what it is and whether or not they might qualify.

Quick History of the EITC

The EITC was enacted when President Gerald Ford was in office through the Tax Reduction Act of 1975. Its original intent was to be a temporary refundable tax credit to help provide financial assistance to working families with children.

The credit was made permanent by the Revenue Act of 1978 (President Jimmy Carter).

Who Qualifies for the EITC?

To determine whether you qualify for the EITC, look to the rules set forth by the IRS, recited here directly from IRS.gov for your convenience:

• Your filing status: You must file your taxes as an individual or married filing jointly.
• Your qualifying children: “Qualifying children” are children you can claim for the EITC. Taxpayers with qualifying children are generally eligible for a higher EITC payment.

The definition of a qualifying child includes more than just the taxpayer’s biological son or daughter – more on that later. Under some circumstances, even taxpayers with no qualifying children are eligible to claim the EITC.

• Your age: If you have no qualifying children, you must be at least 25, but younger than 65 at the end of the year.
• Your income source and amount: Income from a number of different sources counts, including wages, salaries, self-employment, and certain disability payments.
• Your investment income: Your investment income must not exceed a certain amount. For the year 2020, this amount is $3,650.

Investment income includes things like capital gains, bank account interest, and dividends.

Further, in order to claim the EITC for the tax year 2020, you must meet these adjusted gross income limits too:

For members of the military and clergy, there are additional guidelines.

To Claim a “Child” for the EITC

To be eligible for the EITC, your relationship with the child being “claimed” must fall within certain definitions. The child must be your:

• Son or daughter
• Stepchild
• Legally adopted child
• Foster child
• Sibling – step, half or whole
• A descendant of any of the above

Further, the “child” must live with you for more than half the year (in the U.S.), be under 19 on December 31^st unless the child is a full time student and then it's younger than 24. There are no age restrictions if the child is permanently and totally disabled, however.

The IRS Wants to Help

According to the IRS, approximately 20% of eligible taxpayers do not claim the EITC. As such, the IRS has some very helpful resources to help determine whether or not you qualify:

• Within the IRS website is an interactive tool called the EITC Assistant, which is available in both English and Spanish.
• A one-page questionnaire, Publication 5334, Do I Qualify for EITC?
• On January 29^th, the IRS will host EITC Awareness Day that include hundreds of live events (most of them virtual in 2021)

Your Financial Professional Can Help

The EITC is just one of many complicated tax rules that you may or may not know about. But as your financial professional, I want to help ensure that everyone who is eligible claims it.

After all, it’s your money.

Important Disclosures

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This article was prepared by FMeX.

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