A number of years in the past, I helped a just lately divorced mother put together her first tax return on her personal.
She was anxious about coping with taxes as a result of her ex had all the time dealt with them for her and anxious that she’d owe the IRS as a result of she didn’t make a lot cash.
Thanks to the Earned Income Tax Credit, not solely did she not owe, however this single mother ended up getting a decent-sized refund she may put towards paying her payments.
That’s the ability of the Earned Income Tax Credit. Read on to learn the way this beneficial tax credit score works, and whether or not you’ll be able to profit from it too.
Understanding Earned Income Tax Credit
The U.S. federal earnings tax system is progressive, that means the extra money you make, the upper your tax fee. But Social Security and Medicare taxes aren’t progressive. As a end result, low-income folks find yourself paying a a lot bigger proportion of their wage in direction of payroll taxes than high-income taxpayers do.
To assist offset this and encourage folks to work, Congress created the Earned Income Tax Credit (EITC) in 1975. Forty-five years later, this tax credit score continues to be out there and offering tax aid to low- and moderate-income employees, particularly these with dependent youngsters.
The EITC is a refundable credit score, that means it could actually cut back your tax legal responsibility to zero, and also you’ll obtain any remaining credit score within the type of a tax refund.
The most credit score is dependent upon the variety of “qualifying children” you declare in your return. The IRS has a four-part check to establish a qualifying youngster:
Relationship. The youngster have to be associated to you ultimately. They will be your son, daughter, stepchild, eligible foster youngster, adopted youngster, grandchild, brother, sister, half-brother, half-sister, stepbrother, stepsister, niece, or nephew.
Age. The youngster have to be below age 19 or a full-time scholar below the age of 24 on the finish of the 12 months. If you file a joint return, the qualifying youngster have to be youthful than both you or your partner. However, in case you have a dependent that’s completely and completely disabled, the age limitation doesn’t apply.
Residency. The dependent should have lived with you within the U.S. (or together with your partner for those who file a joint return) for greater than half the 12 months.
Joint Return. Normally, you’ll be able to’t declare somebody as a qualifying youngster in the event that they file a joint return with a partner. However, there’s an exception for when the dependent was not required to file a tax return (as a result of they didn’t earn sufficient earnings) however filed a joint return solely to assert a refund of taxes withheld.
For the 2019 tax 12 months (returns filed in 2020), the utmost EITC credit score is:
$6,557 with three or extra qualifying youngsters
$5,828 with two qualifying youngsters
$three,526 with one qualifying youngster
$529 with no qualifying youngsters
How to Qualify for Earned Income Tax Credit
The EITC can ship vital tax financial savings for some taxpayers, however there are a variety of sophisticated eligibility guidelines for claiming it. Pay consideration to those guidelines, as a result of for those who attempt to declare the EITC once you’re not eligible, the IRS can bar you from claiming it for as much as 10 years.
Rule #1: Earned earnings under the restrict
First, to qualify for the EITC, you could have what the IRS refers to as “earned income.” Earned earnings contains wages, salaries, ideas, commissions, or earnings from self-employment or farming. People whose solely earnings comes from Social Security, welfare, pensions, or funding returns aren’t eligible.
And because the EITC is designed to profit folks with low earnings, it’s solely out there to taxpayers whose earnings falls under sure limits, primarily based on submitting standing and the variety of qualifying youngsters listed on the return.
For the 2019 tax 12 months, your earned earnings and your adjusted gross earnings (Line 8b of Form 1040), should every be lower than:
$50,162 ($55,952 married submitting collectively) with three or extra qualifying youngsters
$46,703 ($52,493 married submitting collectively) with two qualifying youngsters
$41,094 ($46,884 married submitting collectively) with one qualifying youngster
$15,570 ($21,370 married submitting collectively) with no qualifying youngsters
Rule #2: Must have a Social Security quantity
You, your partner, and any qualifying youngsters listed in your tax return should have a legitimate Social Security quantity (SSN). You can’t declare the EITC utilizing an Individual Taxpayer Identification Number – a quantity issued by the IRS to overseas nationals and different people who aren’t eligible for an SSN however are legally required to file a U.S. federal earnings tax return.
Rule #three: Not submitting married submitting individually
You can’t declare the EITC if you’re married and file individually out of your partner. Any different submitting standing can qualify for the credit score.
Rule #four: You have to be a U.S. citizen or resident alien
You (and your partner if married) should have been a U.S. citizen or resident alien all 12 months, or a nonresident alien married to a U.S. citizen or resident alien and submitting a joint return.
Rule #5: Limited funding earnings
Your funding earnings for the tax 12 months have to be lower than $three,600. Investment earnings contains curiosity, dividends, capital features, rents, and royalties.
Rule #6: Not claiming a overseas earned earnings exclusion
If you file Form 2555 to assert an exclusion of earnings earned abroad out of your gross earnings, you can not declare the EITC.
Rule #7: Can’t be the qualifying youngster of one other taxpayer
You can’t be eligible to be claimed as a dependent or qualifying youngster of one other taxpayer and declare the EITC.
Rule #eight: Additional rule for folks with no qualifying youngster
If you don’t have a qualifying youngster, you (or your partner, if married) should:
Be at the very least 25 years previous however youthful than 65 by the top of the 12 months, and
Have resided within the U.S. for greater than half the 12 months.
There are some extra guidelines for members of the navy, ministers, members of the clergy, individuals who obtain incapacity advantages, and taxpayers impacted by disasters. You can be taught extra about these particular EITC guidelines from the IRS.
If you want extra assist with the EITC eligibility guidelines, the IRS gives an EITC Assistant software. After answering a number of questions and offering some primary earnings info, you’ll find out for those who’re eligible to assert the EITC, decide whether or not your youngster or youngsters meet the assessments for a qualifying youngster, and estimate your potential credit score.
Similar Tax Credits and Deductions to Consider
Even for those who don’t qualify for the Earned Income Credit, you could possibly reap the benefits of different tax credit and deductions to decrease your tax invoice. Here are a number of to contemplate.
Child Tax Credit
If you’ve got at the very least $2,500 of earned earnings and at the very least one dependent youngster, it’s possible you’ll qualify for the Child Tax Credit. This credit score is value as much as $2,000 for every dependent youngster below age 17 on the finish of the tax 12 months.
The credit score phases out for taxpayers with increased incomes, however the earnings limits are a lot increased than these for the EITC. Single taxpayers with adjusted gross earnings (AGI) over $200,000 or married couples submitting a joint return with AGI over $400,000 will see their credit score diminished by 5% of their AGI. The credit score phases out solely in case your AGI is over $240,000 (for single filers) or $440,000 (for married couples).
If your out there Child Tax Credit exceeds your taxes owed, you’ll be able to obtain as much as $1,400 of the steadiness as a refund. This refundable portion is also called the Additional Child Tax Credit (ACTC).
Credit for Other Dependents
If you’ve got a dependent that doesn’t meet the necessities to assert the Child Tax Credit, you should still be capable to declare the Credit for Other Dependents. For occasion, you’ll be able to declare this credit score for:
A baby who doesn’t have an SSN however does have a Taxpayer Identification Number
A baby who’s age 17-18 or age 19-24 and in class
Other older dependents, equivalent to an aged guardian
The most Credit for Other Dependents is $500, and it has the identical phase-out threshold because the Child Tax Credit.
Child and Dependent Care Credit
If you paid a care supplier to care for a kid or different dependent when you labored or actively appeared for work, you would possibly qualify for the Child and Dependent Care Credit.
The credit score is value a proportion of your allowable care bills. You can use as much as $three,000 of bills for one dependent or $6,000 of the prices of care of two or extra dependents. The proportion ranges from 20% to 35% of your bills, relying in your earnings. The increased your earnings, the decrease your proportion. However, there isn’t a higher restrict on earnings for claiming the credit score.
To qualify, you have to have paid somebody to take care of:
A baby below age 13 on the finish of the tax 12 months whom you declare as a dependent in your return
Your partner, if they’re unable to maintain themselves and lived with you for at the very least half the 12 months
Another individual claimed as a dependent in your return, if that individual can’t maintain themselves and lived with you for at the very least half the 12 months
These are only a few tax deductions and credit out there to people and households in 2019. If you would possibly qualify for a number of of those tax breaks, take time to analysis the principles or discuss to a tax skilled. Claiming them can considerably decrease your tax invoice and even end in a beneficiant refund.
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