If you fall in the category of moderate to low-income earners, filing for Earned Income Credit (EIC) is one of the easiest ways to decrease the amount you pay in taxes. Your earned income includes everything from your daily wages, tips, bonuses, salaries and any other income that your receive from an employer.
What is Earned Income Credit (EIC)?
Earned Income Credit (EIC) is a refundable tax credit that offers tax breaks to taxpayers who don’t make a lot of money. The tax credit was created as a way to bridge the gap between low income and to empower people to move out of welfare. This form of the tax credit is applicable to taxpayers even if they do not have dependent children. You can also get a refund if your tax credit exceeds your tax liability.
How does EIC work?
As mentioned above, EIC is an instrument to reduce the amount of tax that low-income taxpayers are liable to pay. Since it is a refundable tax credit, the IRS is liable to pay the taxpayer an amount that is higher than the taxpayer’s tax bill.
For example: If you owe $1,200 in taxes and you are eligible for a $2,000 tax credit, the surplus $800 will have to be refunded to you.
The EIC ranges between $1,502 and $6,728 for the tax year 2021. However, this depends on factors such as your filing status and the number of dependent children you have.
What are the qualifiers?
The following are the criteria to meet if you are to qualify for EIC:
- You earned income has to be at least $1. This does not include income that you receive from unemployment or pensions.
- For the tax year 2021, your investment income has to be less than $10,000. For taxes filed for the tax year 2020, the investment income has to be less than $3,650.
- You cannot claim EIC if you are married and you and your spouse are filing your taxes separately.
- You can claim Employment Income Credit if you are married but separated from your partner. In order to qualify under these guidelines, yourchild should have been living with you for a minimum of 6 months during the separation. Additionally, you and your spouse should have been living separately for the last 6 months.
- You should not be liable to file Form 2555- Foreign Earned Income or Form 2555-EZ for Foreign Earned Income Exclusion.
- Other factors that also play a role in qualifying for the tax credit for dependents includes age, residency requirements and relationship status.
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EIC for children
The EIC allows you to make tax credit claims for dependent children as well. The dependent child has to be under the age of 19. If the child is a full-time student, the eligibility age to claim tax credits is 24 years old. For children with disabilities, there is no upper age limit to claim Earned Income Credit.
There are a number of revisions to the EIC rules for the tax year 2021. These revisions are mostly with regard to the maximum amount of the credits and the qualifying rules for those without dependents. Check out Beem Tax Calculator to get a quick and accurate estimate of your federal and state tax refund.