New Earned Income Credit rules for people with children
Several new rules can enable people with children to qualify for more Earned Income Credit (EIC).
According to the IRS, approximately 25 million workers and families got about $62 billion in EIC in 2019. The new rules will affect a lot of people. Couples filing married jointly can have up to $57,414 income and qualify for EIC in 2021.
One new rule is that parents who file married filing separately who have qualifying children can now claim the (EIC). However, there are several requirements to claim EIC when using this filing status.
The qualifying child must have resided with that parent for more than half the tax year. Additionally, they must have either lived separately from their spouse during the last half of the year or have a written separation decree/agreement and lived separately from the spouse as of the end of the tax year.
As a result of the new tax law, a taxpayer filing separately who separated from their spouse around the end of the tax year (with a written decree) will now be eligible for the EIC. In previous years a separated spouse who wanted to claim the EIC had to qualify to file as head of household. The head of household status required that the taxpayer had to live separately from their spouse during the last half of the tax year.
Two more changes apply to taxpayers with qualifying children.
The first change is advantageous if your income was more in 2019 than 2021. Since many businesses were still financially impacted by the pandemic, this option will help many people whose income has declined since 2019. In tax year 2021, you can look back two years and use 2019 earned income instead of 2021 earned income when calculating the credit. This is an option if the 2019 earnings will increase the amount of credit that can be claimed.
The second change increased the cap on investment income for purposes of qualifying for the EIC. In 2021 you can have investment income of up to $10,000 and qualify for the EIC. Previously, the investment limit had been $3,650 for qualifying for EIC.
Generally, the amount of EIC will be increasing for most people for the 2021 tax year. Some people who did not previously qualify in previous years may now qualify due to reduced income due to the pandemic. And people whose income dropped due to the pandemic will have the option to use their income from 2019 to increase their EIC.
If you qualify for EIC, be sure to compare your income from 2021 and 2019 to receive the greatest amount of the credit. The maximum amount of EIC for 2021 is $6,728. Claiming the maximum amount of EIC by calculating the amount based on the most advantageous year could make a big difference in the amount of your refund.
If you have already filed your 2021 return, you can file an amended return if you did not claim the maximum EIC that you were eligible to receive.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org