By Karen Lynch | American Express Credit Intel Freelance Contributor
6 Min Read | January 24, 2021 in Money
$62 billion in federal earned income tax credits were issued in 2020 to help low- and lower-middle-income families boost their standard of living.
Federal and state credits depend on your level of earnings, marital status, and number of children.
For the 2020 tax year, the IRS is offering a tax relief for taxpayers whose 2019 income was greater than their 2020 income.
Earned income tax credits aim to reduce poverty – particularly in working families. The federal earned income tax credit, also known as the EITC or earned income credit, helped some 25 million American workers and their families get a tax break or refund in 2020.1 Meanwhile, many states and some cities also provide earned income tax credits.
You only qualify for the credit if you work to earn an income. That’s the “earned” part of its name. Then, your income level, marital status, and number of “qualifying” children are the three biggest factors in determining whether you get a tax credit and for how much. Although you don’t have to have a child to be entitled to a credit, you are less likely to qualify if you don’t. And if you qualify, you will get a much smaller credit without children.
Check out the accompanying table to see how the IRS breaks down potential earned income tax credits for 2020, based on those three major factors.
Earned Income Tax Credit Phases for 2020
|Tax Filing Status||Maximum Adjusted Gross Income to Get Any Credit||Max Credit Amount|
|Single, Head of Household, Widowed, no children||$15,820||$538|
|Single, etc., 1 child||$41,756||$3,584|
|Single, etc., 2 children||$47,440||$5,920|
|Single, etc., 3 children||$50,594||$6,660|
|Married, no children||$21,710||$538|
|Married, 1 child||$47,646||$3,584|
|Married, 2 children||$53,330||$5,920|
|Married, 3 children||$56,844||$6,660|
Source: "Earned Income and Earned Income Tax Credit (EITC) Tables," IRS
The next logical question, then, is what’s a qualifying child? The IRS has certain relationship, age, and residency requirements. For instance, the child must be a son, daughter, adopted child, stepchild, foster child, or a descendent of any of these.2 Online tools can help determine whether your child qualifies.3
You might also ask, what’s income? For the purposes of an earned income tax credit, it’s money you earn in a given year either working for someone or running your own business. To get more specific, this tax credit relies on your adjusted gross income, or AGI, which is based on your earned income. For more on AGI, read “What Is Adjusted Gross Income?”
If you’re also an investor, your investment income can only be $3,650 or less in 2020. Figures like this one tend to change from year to year, and are published on the IRS website.
You have to file for the credit to receive it. Obvious, right? Yet the IRS says about 20% of eligible people don’t claim the federal credit. That’s in part because many low-income workers’ earnings are so low that they owe no federal tax,4 and also because workers move in and out of eligibility for the earned income tax credit based on changes in marital, parental, and financial status. But earned income credits are refundable, meaning that you can receive money even if you owe no taxes, as long as you file for them. If the credit you are allowed exceeds the taxes you’ve paid during the year – such as those withheld from your paycheck – the IRS will send you the balance.
And tax credits are generally worth more than tax deductions. Tax credits directly reduce the amount of tax you owe, while deductions only lower your taxable income. If you were in a 25% tax bracket, for instance, a $1,000 credit would lower your tax bill by $1,000, whereas a $1,000 tax deduction would only drop it by $250.
Federal earned income tax credits are calculated on a bell curve, climbing from $1 in income to about $10,000 to $14,000 (depending on filing status and number of children). The credit then plateaus until you reach about $19,000 to $25,000 in earned income (again, depending on those same factors), and then phases out (declining even to zero, for only one or two children) as it approaches the maximum income of about $46,000 to $56,000.5 Children make a big difference. For example, a married couple with about $44,000 in income could get around $300 if they have one child, but over $1,500 if they have two, and over $2,000 if they have three or more. Here’s the range published by the IRS6:
The IRS issued a total of about $62 billion in earned income tax credits in 2020, for a per-family average of about $2,500.
Under the Taxpayer Certainty and Disaster Relief Act of 2020, you can use your 2019 earned income to figure your earned income tax credit eligibility for the 2020 year – but only if your 2019 income is more than your 2020 income. Why does this matter? Although the earned income tax credit phases out the higher your income, it also phases in – meaning the amount you can earn increases until you reach a certain income level.
So, if the credit you’re eligible for is reduced because of lower income in 2020, you can elect to use your higher 2019 income to prevent losing a portion of the tax credit.
If you qualify for a federal credit, you might also be entitled to a state earned income tax credit in 29 states, Puerto Rico, and Washington, DC. State requirements often mirror federal requirements, with some exceptions. There are online tools you can use to learn more about your state.7
Many states calculate their earned income tax credit benefits as a straight percent of the federal credit – from 3% in Montana to 125% in South Carolina. In California, whose differences include lower age limits (18 years of age), someone making under $30,000 a year could receive a state credit of up to $1,626 to $3,027, if they have one to three or more children, and $243 if they have none.8 Some local governments, such as New York City, also offer earned income tax credits.9 A New York City resident within the federal income limits, married filing jointly with three or more children, could combine federal, state, and local credits to be eligible for up to almost $9,000.
Qualifying for the federal earned income tax credit might also indicate that you qualify for child tax credits and others. Check out “What Is the Child Tax Credit?” and “What Is the Childcare Tax Credit?.” It’s worth your time, since the IRS allows you to combine these credits.
Also helpful: Calculators and free tax preparation help10 are available online and in person, from the IRS and some state governments. Some tax software packages also include the earned income tax credit.
In general, all tax credits for individuals represent the government’s attempt to encourage certain behaviors in Americans, to achieve specific goals. The earned income tax credit is designed to reward people who enter and stay in the workforce, with the aim of both improving their family’s standard of living and contributing to the nation’s economic growth. Some congressmembers are looking to expand the population that qualifies. For example, the Building Our Opportunities to Survive and Thrive Act (BOOST) would expand the earned income credit to those who earn no income and have no children. The proposed law recognizes that nonworking caregivers for elderly parents, disabled veterans, students, and seniors are among the groups who are currently excluded from the benefit.11
Details of the earned income tax credit change from year to year, but the credit itself has demonstrated staying power. The federal credit has been in place since 1975, and Rhode Island was the first state to enact an earned income tax credit, in 1986.12
Earned income tax credits can range from a few hundred dollars to more than $6,500, and aim to help working families get tax breaks or refunds. Your eligibility depends on your income level, marital status, and number of children. Even if your earnings are so low that you pay little or no income taxes, you might be entitled to this credit – making it akin to a grant. Online tools and free tax preparation advice are available to help you figure it out.
1 “Earned Income Tax Credit Fast Facts,” IRS
2 “Qualifying Child Rules,” IRS
3 “Use the EITC Assistant,” IRS
4 “More than 44% of Americans Pay No Federal Income Tax,” MarketWatch
5 “Earned Income Credit,” IRS
6 “Income Limits and Range of EITC,” IRS
7 “State Tax Credits,” Tax Credits for Workers and Their Families
8 “California Earned Income Tax Credit and Young Child Tax Credit,” California Franchise Tax Board
9 “EITC: Cash That Counts,” New York Department of Taxation and Finance
12 “Tax Credits for Working Families: Earned Income Tax Credit,” National Conference of State Legislatures