In 1975, the U.S. government instituted what was supposed to be a temporary band-aid for low-income constituents. The government did so in the form of an EITC (earned income tax credit), which gave money to people whose earned and investment income sat below a required threshold.
Historically, the EITC has increased to align with inflation—something that the government should probably focus on with minimum wage—and 2021 isn't any different.
What is the federal earned income tax credit and who qualifies?
The EITC is a tax credit that comes in the form of a write-off or return. It's a way to provide tax subsidizations for low-income families and individuals. Compensation is based on your income level as well as how many dependents you have.
Earned income can include wages and tips withheld by a W-2, income from a 1099, self-employment earnings, union strike benefits, disability benefits prior to the minimum retirement age, and nontaxable combat pay.
It doesn't include pensions, social security, alimony, or other types of non-earned income.
Some states have their own EITC program. In New Jersey, Governor Phil Murphy lowered the eligibility age to 21 and increased the payouts to 40 percent of the federal level.
Earned income tax credit limitations for the 2020 tax year
For the 2020 tax year, the income limit for single, head of household, or widowed people with 0–3 dependents ranges from $15,820–$50,594. For married couples filing jointly, the range is $21,710–$56,844.
Meanwhile, investment income must not exceed $3,650.
If you don't have any dependents and you qualify for the EITC, you will earn $538 in credit. One dependent will get you $3,584, two dependents gets you $5,920, and three or more dependents gets you $6,660.
EITC rises with inflation and 2021 isn't any different
The 2021 tax season is still a year away, but it's worth keeping tabs on the EITC qualifications so you can stay ahead of the game and earn credit where it's due.
The maximum annual gross income for individuals in 2021 ranges from $15,980–$51,464. For married couples, the range is $21,920–$57,414.
The investment income limit remains the same for 2021. However, credit compensation increases. Someone with no dependents gets $543. One dependent gets $3,618, two gets $5,980, and three or more get $6,728.
Backtracking on EITC credit claims and other must-knows
If you were eligible for EITC in the past three years but didn't claim the credit, you can still do so. You will receive a check as payment.
It's worth noting that anyone who claims the EITC won't receive the tax return until at least Feb. 15 of the applicable year.
If you want to claim this year, attach the EIC form to your 1040. The rate can be tricky to calculate, and low-income people are less likely to have access to a paid accountant. Make sure you're only claiming children who qualify, file as single or married correctly, report only correct expenses, and record your social security number correctly. If you're low income, the IRS Free File program is available to you for assistance.