New Rules: Earned Income Tax Credit 2021/2022

New rules for Earned Income Tax Credit 2021/2022 and many see changes resulting in larger refunds.

With the passing of the American Rescue Plan Act of 2021 came some big changes to the Earned Income Tax Credit, or EITC. These changes can make a huge impact on families filing tax returns for tax year 2021.

The basic rules to claim the EITC are pretty straightforward

  1. You have worked and have *earned income under $57,414
  2. Have investment income below $10,000
  3. Have a valid Social Security Number by the due date of your 2021 return (including extensions)
  4. Be a U.S. Citizen or Resident Alien all year
  5. You can not claim this credit if you file Form 2555 (form related to foreign earned income)
  6. Have a qualifying filing status

So, what changed in qualifying for EITC?

The credit amounts:

The maximum credit for filing jointly as a married couple and claiming three or more qualifying dependents amounts to $6,728 in 2021, with the credit completely phased out at $57,414 of adjusted gross income (AGI). If you are a single filer with no dependents, you can receive a maximum credit of $1,502 with your phaseout beginning at $11,610 of AGI.

Investment income:

Prior to 2021, the maximum amount of investment income you could report and still qualify to claim the credit was only $3,650. This income is popularly from sources such as Rental Properties, Dividends, and capital gains.

Prior income utilization:

In some instances, you may choose to elect to use your 2019 income to calculate your EITC if it results in a better refund. You would choose this option if your 2019 earned income was higher than 2021 and would result in a higher amount of a refund.

Your age without a qualifying child:

New for 2021, the age limits have been expanded for claiming EITC if you do not have a Qualifying Child. You are eligible to claim the EITC without a qualifying child if you meet all the following rules. You (and your spouse if you file a joint tax return) must:

  • Meet the EITC basic qualifying rules
  • Have your main home in the United States for more than half the tax year
    • The United States includes the 50 states, the District of Columbia and U.S. military bases. It does not include U.S. possessions such as Guam, the Virgin Islands or Puerto Rico
  • Not be claimed as a qualifying child on anyone else’s tax return
  • Be at least age 18 at the end of the tax year (usually Dec. 31)
    • The minimum age to claim the EIC is generally age 19; however, if you are a qualified former foster youth or a qualified homeless youth, you need to be at least age 18.
    • If you are a specified student (other than a qualified former foster youth or a qualified homeless youth), you need to be at least age 24.

Filing Status Types allowed for Earned Income Tax Credit

In 2021, to qualify for the EITC, you can  use one of the following statuses:

Change to marital separation rules

Under the old rules, you had to file a joint tax return with your spouse in order to claim the EITC. The exceptions for a married person were that you had to be living separately from your spouse for the last half of the year, and the children had to be living with you during that time.

This rule still applies for 2020 tax returns, but for 2021 and beyond, it’s been tweaked…slightly.

Now, you will be able to claim the EITC if:
– You file separately from your spouse
– The children live with you for more than six months out of the calendar year
– You have a separation agreement in place
– You live apart as of the last day of the year (12/31/21)

Taxpayers with disabled family members should check to see if they qualify under the IRS special rules:

Types of Earned Income that qualifies for the Earned Income Tax Credit:

  • Wages, salary or tips where federal income taxes are withheld on Form W-2, box 1
  • Income from a job where your employer didn’t withhold tax (such as gig economy work) including:
    • Driving a car for booked rides or deliveries
    • Running errands or doing tasks
    • Selling goods online
    • Providing creative or professional services
    • Providing other temporary, on-demand or freelance work
  • Money made from self-employment, including if you:
  • Benefits from a union strike
  • Certain disability benefits you got before you were the minimum retirement age

Earned income does not include:

  • Pay you got for work when you were an inmate in a penal institution
  • Interest and dividends
  • Pensions or annuities
  • Social Security
  • Unemployment benefits
  • Alimony
  • Child support

These changes, and the possible upcoming changes, are likely to continue to change and be even more confusing. Luckily, we have your back and stay updated so you don’t have to.

As always, if you have questions give us a call from anywhere in the US.

Your team at West Ridge Accounting Services

[6:50 PM] Erik Olthof

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors prior to acting on any of the information provided here.

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