Although the tax reform passed late in 2017 seemed to change everything, it actually had little effect on the earned income tax credit alone. But the credit is still complicated, and taxpayers should understand how it works.
First of all, it's wide-ranging: In 2019, 25 million working families and individuals received the EITC. The size of the EITC depends on a recipient's income, marital status and number of children. Larger credits go to families with more children. Income limits on eligibility extend well into what many consider to be the middle class — for 2020, a married couple with three children making $56,844 is the top income that can claim the EITC, which reaches a maximum of $6,660. (These amounts tend to go up slightly each year.)
The EITC is a credit equal to a percentage of earnings up to a maximum credit, with the largest credits being reserved for those with incomes significantly below the upper limits. It provides support to low- and moderate-income working parents and, to a much lesser degree, to childless individuals. Working-poor individuals who have no children and incomes below $15,820 can receive a very small EITC — just above $500. It's a similar story for a married couple with no children earning $21,710.
One of the biggest benefits of the EITC is that it can give taxpayers money back even if they wouldn't otherwise owe any tax. The credit is an example of a refundable tax credit: You may receive a refund from the IRS if your total tax liability is less than the amount of the credit.
Unfortunately, according to the IRS, as many as one in five eligible taxpayers don't claim the EITC, even though it can be helpful: It is not just a handout, but a program that induces more people into the workforce and encourages them to work more by raising their wages. The credit is structured not to penalize earning more.
Instead of just taking money and giving it to people at the bottom end of the income distribution, the EITC encourages work. But there's a limitation on the amount of investment income that a taxpayer can earn and still qualify for the credit. Those who have more than $3,650 in investment income aren't eligible to take the credit.
While some are calling for broadening the program to include more childless individuals, the large majority of benefits from the credit go to families with children.
Since it may not be obvious that you or your family members are eligible to receive the EITC, be sure to check with a financial professional, as the calculations can be complicated and you may need substantial documentation.
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