Earned Income Credit (EITC)

The American Rescue Plan (ARP) expands the 2021 Earned Income Tax Credit (EITC) for taxpayer with no children in a few ways. First, the new law generally lowers the minimum age from 25 to 19 (except for certain full-time students). Therefore, for 2021, the applicable minimum age is decreased to 19, except for students (24 years old) and qualified former foster youth or homeless youth (18 years old).

 The Act also eliminates the maximum age limit (65), so older people without qualifying children can claim the 2021 credit, too. The maximum credit available for childless workers is also increased from $543 to $1,502 for the 2021 tax year.

As with the 2020 EITC, the taxpayer can use his or her 2019 earned income instead of his or her 2021 income if that will increase his or her credit amount. This provision could help many people who were laid off, furloughed, or otherwise suffer an income loss this year. Lastly, there are a few permanent EITC changes in the American Rescue Plan. For instance, workers who otherwise would not be able to claim the credit because their children cannot satisfy the identification requirements can now claim the childless EITC. Certain married but separated couples can now claim the EITC on separate tax returns, too.

Under the Tax Cuts and Jobs Act (TCJA), to reduce waste, fraud, and abuse, a taxpayer is required to provide a workeligible Social Security Number (SSN) in order to claim the refundable Earned Income Tax Credit. In addition, with respect to the Earned Income Tax Credit, taxpayers are required to properly reflect any net earnings from self-employment in their claims for the credit and employers would be required to provide additional information on their payroll tax returns.

The IRS also is granted additional authority with respect to the substantiation of earned income amounts. Use Publication 596 – Earned Income Tax Credit (EITC) to determine eligibility.

To qualify for the credit adjusted gross income (AGI) must be below a certain amount and the taxpayer must: (264)

➢ Have a valid Social Security Number (if the taxpayer is filing a joint return, his or her spouse also must have a valid Social Security Number).
➢ Have earned income from employment or from self-employment.
➢ Have a filing status other than married filing separately.
➢ Be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
➢ Not be a qualifying child of another person (if the taxpayer is filing a joint return, his or her spouse also cannot be a qualifying child of another person).
➢ Not have investment income over a certain amount.
➢ Not file Form 2555 – Foreign Earned Income (related to foreign earned income).
➢ Have a qualifying child who meets four tests (the Age, Relationship, Residency and Joint Return tests) OR:

o Be age 25 but under 65 at the end of the year.
o Live in the United States for more than half the year.
o Not qualify as a dependent of another person.

If the taxpayer qualifies, the amount of EITC will depend on filing status, whether the taxpayer has children, the number of children, and the amount of wages and income for the tax year. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

Earned Income Tax Credit (EITC) Limitations
The American Rescue Plan (ARP) increases the maximum credit available for childless workers from $543 to $1,502 for
the 2021 tax year. Additionally, the Act increased the amount of the childless EITC by doubling the phase-in and phaseout
percentages from 7.65 to 15.3%.
For tax year 2021, the maximum Earned Income Tax Credit (EITC) for low and moderate-income workers and working
families rises to $6,728, up from $6,660 in 2020. The EITC is a refundable tax credit for certain people who work and have
earned income under $57,414. The credit varies by family size, filing status and other factors, with the maximum credit
going to joint filers with three or more qualifying children.