Do I Qualify for Earned Income Tax Credit?

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This federal tax credit can effectively reduce the amount you owe. It may even deliver a refund.

 

Like most working Americans, you want to make the most of tax deductions and credits each year, to reduce the amount you owe to the Internal Revenue Service (IRS). But, if you are like many taxpayers, you may be unsure how to make the most of these tools. You may not be sure which ones even apply to you. Here, we’ll take a closer look at an important tax credit — the Earned Income Tax Credit (EITC), which provides a welcome break for many working families. 

The Earned Income Tax Credit is a tax-savings tool for lower-income households in the United States. It is designed to help reduce taxes owing; for some, it can even translate into a refund. 

So, how do you know if you qualify? How do you make the most of the Earned Income Tax Credit? With inflation on the rise, it’s more important than ever to make the most of tax credits and deductions.

Not to worry—we’re here to help. We’ve put together a few details on the Earned Income Tax Credit and several things to think about this year, as you prepare to file your taxes.

 

Earned Income Tax Credit — The Basics

In simple terms, the Earned Income Tax Credit is a federal credit, designed to help taxpayers with low-to-moderate income. It is used to supplement wages and help offset the impact of Social Security taxes for those who need it most. 

Created in 1975, as part of the Tax Reduction Act, the Earned Income Tax Credit was first thought of as a “work bonus plan” to help those with low income. It was meant to be a temporary measure but has remained in place. It is widely viewed as an anti-poverty tax tool. 

For those who qualify, the Earned Income Tax Credit provides real, direct tax relief. For some, it will even translate into a tax refund. 

 

 

Tax Credits: A Quick Review

As you prepare your taxes for the current tax year, it may be useful to have a short review of tax credits. Unlike tax deductions, which can lower your taxable income within your marginal tax rate, tax credits can lower the amount of tax you owe — dollar for dollar. 

In general, a tax credit is more valuable to taxpayers—it directly reduces the amount of tax due. Among the three kinds of tax credits—refundable, non-refundable and partially refundable—there are variations in the benefits to taxpayers. A non-refundable tax credit, for example, can reduce your tax owing to zero, but it is not able to provide you with a refund. 

Thankfully, the Earned Income Tax Credit is a refundable tax credit. Not only can it reduce taxes owing to zero, but it can also result in a return if taxpayer liability is below zero. Even better, the Earned Income Tax Credit can do double-duty, offsetting taxes that can’t be offset by other tax credits, including those that are non-refundable.

 

Recent Changes 

Like many U.S. tax rules and regulations, the Earned Income Tax Credit has undergone adjustments over the last few years, in response to the economic hardship of the pandemic. 

In 2020, Congress enacted legislation that allowed taxpayers to use income from either 2019 or 2020 on their returns. The logic was simple — many people had a lower income in 2020 than the previous year. The government wanted to provide relief by allowing taxpayers to use higher earned income in determining their Earned Income Tax Credit. 

In 2021, the American Rescue Plan Act (ARPA) made further adjustments to broaden the use of the Earned Income Tax Credit, providing more people with financial relief. The greatest adjustments broadened eligibility for taxpayers without children or other dependents.

 

Determining Eligibility

To qualify for the Earned Income Tax Credit, there are several factors to consider. To start,
you must be at least 19 years old; you must live in the U.S. for more than half of the year and you must have earned income or adjusted gross income (AGI) below specific levels. In addition, if you have investment income, it must be below a threshold amount.  

Even with these variables met, your eligibility will further depend on the number of dependents you have.  

If, for example, you are a single filer with three dependents and you have an annual earned income of less than $51,464, you would qualify for an Earned Income Tax Credit of up to $6,728. 

On the other hand, if you are married and filing jointly with no children or dependents, with a joint earned income of less than $27,380, you would qualify for an Earned Income Tax Credit of up to $1,502. 

Another factor that determines your eligibility for the Earned Income Tax Credit includes the amount of investment income you have earned. As of 2021, if your earned income is supplemented by investment income, the annual limit for the latter has been increased to $10,000.
  

Get the Right Help 

With changing tax regulations, and inflation on the move, it is more important than ever to make sure you take advantage of every tax tool available. The less money you pay to the IRS, the more that remains in your pocket. 

While many Americans assume they can—or should—do their own taxes, they could be missing out on tax credits, deductions and other savings. Just as you would turn to a lawyer for legal issues, it is essential to seek the help of a professional when it comes to tax planning, to maximize potential returns, while minimizing the amount you owe.

An experienced tax planning professional can deliver peace of mind by handling your return with accuracy and attention to detail. Tax experts are up to speed on current regulations and will find opportunities for savings that you might not even know exist.  

Importantly, a tax professional also knows how to handle tax anomalies or potential issues as they arise. If your taxes are complex or you are facing challenges — tax liens, delinquent taxes, etc. — a trusted tax professional will deliver the right support and help you maximize any gains.

Of course, not every tax professional is equal. Be sure to choose an experienced, professional team with a strong track record and exceptional reviews. As with any professional you hire, you want to trust that you’ll receive top-quality service while being treated with the utmost respect. 

At Franskoviak Tax Solutions, we have helped our clients with tax planning for more than 30 years. We take pride in handling the details of tax planning, including making the most of tax credits such as the Earned Income Tax Credit. We not only file personal and business taxes but also help with IRS tax relief and tax problems such as IRS tax notifications, tax liens, delinquent taxes and more.

Headquartered in Michigan, with satellite locations in St. Petersburg, Florida, Cincinnati, Ohio and Indianapolis, Indiana, Franskoviak Tax Solutions provides comprehensive tax services with first-class expertise and a personalized, boutique-style approach. 

Start with a free consultation—we’re here to help you maximize tax credits as part of an overall tax planning strategy. 

 

Other Helpful Articles:

Advanced Payments of the Child Tax Credit and What to Do

Make the Most of Child Tax Credits

Tax Planning: Why Using a Professional Matters

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