Expanding the Earned Income Tax Credit

The Earned Income Tax Credit, or EITC, was designed to help low- to middle-income working families make ends meet. The EITC can reduce the amount of taxes you owe and can be refunded to you when the amount of the credit is greater than your taxes. Not familiar with this tax credit? This article explains more about the EITC.

Why was an EITC expansion needed?

Many tax experts (myself included) would say that an expansion of the EITC was long overdue. The COVID-19 pandemic uncovered many economic disparities causing lawmakers to recognize that the EITC currently doesn’t provide a sufficient credit for taxpayers who aren’t raising children in the home. For working adults without qualifying children in their home, the credit amount phases out much quicker than it does for working mothers, fathers, or those raising children in their home. For example, the maximum credit amount for a single taxpayer is $543, but if that taxpayer earns more than $15,980 in a single tax year, they no longer qualify for any earned income tax credit. While the maximum credit for a taxpayer with three qualifying children is $6,728 and it doesn’t phase out completely until a single filer earns $51,464 or a household earns $57,414.

Here is a current breakdown of who is eligible for the EITC:

To see how much EITC you currently qualify for, check out our EITC Calculator.

The expansion under the American Rescue Plan Act of 2021 also included a variety of other expansions/benefits:

• The minimum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students).
• The upper age limit for the childless EITC has been eliminated.
• Certain former foster youth or homeless youth qualify at age 18
•  Qualified former foster youth – an individual who was in foster care at age 14
•  Qualified homeless youth – eligibility based on being able to certify whether the youth is either homeless or on the verge of homelessness and is self-supporting (kids who have aged out of the ‘system’)
• The income at which the maximum credit amount is reached is increased to $9,820, and the income at which phaseout begins is increased to $11,610 for non-joint filers.
• The maximum credit amount in 2021 increases from $543 to $1,502.
• Allows married filing separately taxpayers to claim the EITC as long as they didn’t live with spouse during the last half of the year and they had a qualifying child living with them at least half the year (and they can’t claim Head of Household).
• Increased investment income limit to $10,000 (from $3,650) beginning in 2021.
• If 2019 earned income is greater than 2021 income, the taxpayer can choose the 2021 earned income to calculate the EITC.

How is expanding the EITC beneficial? 

The EITC is essentially a wage subsidy designed to help lower-income taxpayers with families. Expanding EITC benefits to working adults without children in the home, a group that historically does not receive much benefit from the credit provides this population with the ability to potentially receive a larger tax credit. The maximum earned income tax credit for adults with no qualifying children will be nearly tripled, increasing the maximum credit amount to $1,502 from the current maximum amount of $538 for this group of taxpayers.

The second way this expansion may benefit taxpayers is by allowing more people with higher incomes to claim the tax credit by increasing the income limit. Currently, the credit only applies to those earning less than $16,000, but under the expanded EITC, taxpayers earning up to $21,000 will now qualify.

Tax legislation passed in late December of 2020 included a special “lookback” for the EITC and the Child Tax Credit (CTC), which allows taxpayers to use their 2019 earned income amount to determine eligibility for the 2020 EITC and CTC. Taxpayers can choose the more tax beneficial income year and use that to compute their 2020 EITC and CTC.

Finally, the American Rescue Plan Act of 2021 also eliminated the age cap eligibility for the EITC of 65 years old, making any worker, even those over the age of 65, now eligible for the credit.

Who is affected by an expanded EITC?

The EITC benefits hardworking taxpayers working in lower-paying jobs. People with lower incomes are able to claim the EITC to decrease the amount of taxes owed, and sometimes also get a boost in their tax refund. The expanded EITC will allow even more people to benefit from this valuable tax credit, and in some cases, get an even larger credit.

To learn more about the EITC and to see if you qualify for this credit, schedule an appointment at your nearest Jackson Hewitt office location.