Earned Income Tax Credit: What Is It and Who Qualifies in 2021?

The Earned Income Tax Credit (also known as the EITC or EIC) is a refundable tax credit for American workers earning low to moderate income. It can reduce the amount of taxes you would have to pay or increase your refund. Eligibility for the credit is determined by income.

What Is the EITC?

The EITC is a refundable tax credit. Refundable tax credits are known as refundable because if you qualify for the credit and the amount of the credit is larger than your tax liability, you will get a refund for the difference. In contrast a non-refundable credit can only reduce tax liability to zero and cannot generate a refund. 

The EITC acts as a wage subsidy for certain workers. Originally enacted in 1975 by the Ford administration, it was expanded in 1990, 1993, 2001 and 2009. This year, with the American Rescue Plan, the EITC was temporarily expanded (more on that later). 

The EITC has been the subject of political debates for nearly half a century. One of the main talking points is whether it’s a better idea to increase the EITC or raise the minimum wage. This is because the two welfare ideas have similar goals in raising working people out of poverty.  

The EITC provides benefits to working people with earned income, not to non-working people. This makes it a form of a negative income tax, where earners below a certain threshold receive money from the government rather than pay money from their income.  

Since the EITC goes to workers, it is not considered a handout by many, although it could be considered a form of welfare. Some proponents argue that raising the minimum wage is a more efficient way to help the poor than adjusting the EITC, while others believe the EITC is more effective than raising the minimum wage.  

The purpose of this blog isn’t to argue whether a wage subsidy such as the EITC is better or worse than a forced raising of wages, but it’s helpful to understand the context of why the EITC was put in place.

Who Qualifies for the EITC?

In short, the EITC is for low-income workers with earned income. In the past, the EITC favored workers with children, but recently, the American Rescue Plan increased the credit for workers without children. With the changes in 2021, the EITC is now available to more people:

• For single filers, the income limit for those without children was raised from $15,820 of earned income per year to $21,430.
• For married filers, the income limit for those without children was raised from $21,710 of earned income per year to $27,380.
• The lower age limit for workers was reduced from 25 to 19 (except for certain students), allowing younger workers to claim the EITC.
• The upper age limit for workers was increased from 64 to anyone above 65, allowing all elderly workers to receive the EITC.

With both younger and older Americans now eligible, the EITC has much farther reach than it did even just a year ago. Keep in mind, these temporary changes are currently only in effect through 2021, unless Congress makes permanent changes.

For those with children, the following maximum incomes apply:

How Much Is the EITC?

Right now, the maximum credit for workers without children is $1,502. For those with children, the following are the maximum credit amounts for the EITC:

• 1 qualifying child: $3,618
• 2 qualifying children: $5,980
• 3 or more qualifying children: $6,728

How Can I Claim the EITC?

Anyone looking to claim the EITC must complete Taxpayers Form 8862 and attach it to their tax return. This form also is for the child tax credit (CTC)/additional child tax credit (ACTC), credit for other dependents (ODC) and the American opportunity credit (AOTC).

Form 8862 is a four-page document that requires taxpayers to identify which specific credits they are applying for, along with any children they are claiming for the EITC.

A Summary of the EITC

In essence, the EITC repays the nation’s lowest-paid working people the payroll taxes they may have paid. This makes it one of the largest tools for fighting poverty in the United States, along with programs like Medicaid and food stamps. 

The goal of the EITC, ideally, is to “promote and support work” by providing tax credits to those with low-wage jobs. The EITC does not reward the unemployed because the credit is dependent upon earned income (i.e., all the taxable income and wages a person gets from working, either for someone else or themselves, or from a business or farm they own). 

With credits extending to over $6,000 for those with multiple children, and credits giving back around $1,500 to those without any children, the EITC is a significant opportunity for lower-income workers.

The EITC Is Just One of Many Tax Strategies

While the EITC is a popular credit, did you know there are literally hundreds of other tax planning strategies to use that can potentially save you money? Both businesses and individuals use tools such as Corvee Tax Planning software to find additional tax credits and deductions to reduce their taxes. 

With the ability to automatically calculate thousands of strategy combinations, including comparing current law with proposed legislation, using this technology is the fastest way to find significantly more tax savings. With Corvee, you can:

• Find deductions
• Discover which legal entity is optimal for your situation
• Take advantage of the following bills:
• Tax Cuts & Jobs Act (TCJA)
• Families First Coronavirus Response Act (FFCRA)
• Coronavirus Aid, Relief, and Economic Security Act (CARES)
• Covid Relief & Omnibus Agreement
• American Rescue Plan (ARP)
• Make the most of your insurance 
• Learn niche-specific strategies for your particular business 
• Leverage exit and capital gains advice — and a whole lot mor