The only thing better than reducing your tax bill is getting money back from the IRS. If there's one provision of the tax laws that offers the best chance for the most people to get a refund check from the federal government, it's the earned income tax credit.
The EITC -- sometimes referred to as the earned income credit or EIC -- is one of the most generous tax credits available. It's geared toward working people with low to moderate incomes, and for some families, it can offer as much as $6,728 in cold hard cash.
Yet even though roughly 30 million people are likely eligible to get at least some money from the EITC, the IRS estimates that about 6 million taxpayers leave the credit unclaimed each year. You shouldn't be one of them. Below, we'll go into the details of the earned income tax credit and what you need to know to claim it in 2021.
Image source: Getty Images.
Why is the EITC such a great tax break?
The most important aspect of the earned income tax credit is that it's a refundable tax credit. With most tax credits, if you don't owe taxes, then the credit ends up going unused.
But as a refundable tax credit, the EITC is different. If you don't need to use your EITC to reduce your tax bill, then the IRS will actually cut you a check for the unused portion. That's unusual among tax credits, and it effectively makes the EITC a way that the federal government can get money to those who need it most -- and have earned their right to receive it.
Do I qualify for the EITC?
To get the earned income tax credit, you have to meet several requirements. The most important one is that you need to have earned income from work, whether it's a traditional job or a side gig. If you run your own business, your net income also counts as earned income for EITC purposes. However, things like investment income, pensions, Social Security, or unemployment benefits don't count as earned income.
You also have to meet income limits to qualify for the EITC. Those limits depend on your filing status and how many qualifying children under age 19 or full-time students and under age 24 you have. Here are 2021's EITC income limits:
|
Filing Status |
Income Limit if No Children |
Income Limit if 1 Child |
Income Limit if 2 Children |
Income Limit if 3+ Children |
|---|---|---|---|---|
|
Single, head of household, or widowed |
$15,980 |
$42,158 |
$47,915 |
$51,464 |
|
Married, joint |
$21,920 |
$48,108 |
$53,865 |
$57,414 |
Data source: IRS. Note: The EITC is not available to those who are married and file separately.
The exact amount of the credit depends on where your income falls under the range. The maximum credits for 2021 are $543 for those with no qualifying children, $3,618 for those with one child, $5,980 if you have two children, and $6,728 for those with three or more children. Qualifying children include adopted or foster children, as well as grandchildren, siblings, nieces, or nephews -- as long as they live with you for more than half the year.
How do I claim the EITC?
To claim your earned income tax credit, you have to file a federal tax return. That's the case even if your income is low enough that you ordinarily wouldn't be required to file.
The IRS urges taxpayers to gather important documents before working on your tax return. They include Social Security cards for yourself and qualifying children, tax statements like W-2s and 1099s that show your earned income, bank information to have your refund directly deposited into your account, and other proof of income and expenses.
There's a lot of helpful information on the IRS EITC website. You'll find a tool to help you establish whether and how much you can get from the credit, along with useful tips on making the most of the EITC.
What common mistakes do I need to avoid?
The IRS has found that many people claiming the EITC make the same errors. Among them are:
- Claiming a child who doesn't qualify.
- Having more than one person claim the same child.
- Mismatched Social Security numbers and last names.
- Choosing the wrong filing status.
- Incorrectly reporting income and expenses.
Errors can be costly not just because they affect the amount of your EITC but also because they can delay your credit payment.
Don't miss out!
The EITC is there to help you, so if you qualify, be sure to claim it. It can put thousands of dollars in your pocket.
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