We’ve made it through the first week of the tax filing season! With some tax returns are already on the way for processing, the Internal Revenue Service (IRS) is reminding taxpayers not to forget about the Earned Income Tax Credit (EITC). January 31 has been designated “EITC Awareness Day” – the 14th year of the awareness campaign that alerts millions of workers to this significant tax credit.
“The EITC is a vital tax credit that helps millions of hard-working working families around the nation,” said IRS Commissioner Chuck Rettig. “It’s critical that people review the credit to see if they qualify. Increasing awareness about the EITC is important, and the IRS is proud to support the ongoing efforts by partner groups across the country for sharing this critical information with taxpayers.”
The EITC is the federal government’s most substantial refundable federal income tax credit for low- to moderate-income workers. The credit has been around since 1975 and was intended to offset the burden of Social Security taxes —a chunk of your pay over and above federal income taxes—and to provide an incentive to work. The result? Taxpayers may be entitled to a refund even if they otherwise owe no tax.
There’s a lot of confusion surrounding the EITC. To help clear it up, here are eight myths about the EITC:
1. The EITC is a welfare system for those that don’t work. Please don’t share memes that say that people who do not work get EITC-related tax refunds at the expense of those who do work. That’s not true. To qualify for a refundable tax credit like an EITC (the ones that pay out even if you don’t pay in), you have to work. It’s literally in the name: Earned Income Tax Credit. Earned income typically includes wages, salary, tips, and net earnings from self-employment. It also includes union strike benefits and long-term disability benefits received prior to minimum retirement age and may also include nontaxable combat pay. Earned income does not include passive income, which means income that you aren’t actively generating on your own, like interest and dividends, pay that you receive while incarcerated, retirement income, Social Security, unemployment benefits, and alimony. It also doesn’t include child support (that’s tax neutral).
2. Only families with children qualify for the EITC. If you have earned income and a valid Social Security number, your filing status must be married filing jointly, head of household, qualifying widow(er), or single; you can’t claim the EITC if your filing status is married filing separated. You must also meet specific income criteria. Specifically, your tax year investment income must be $3,500 or less for the year; you must not file form 2555, Foreign Earned Income, or form 2555-EZ, Foreign Earned Income Exclusion; and you must have at least $1 in earned income (yes, that means that a self-employed person who claims a loss won’t qualify). You don’t have to have kids to qualify, but the amount of your tax credit is dependent on your income and the number of your qualifying children. A qualifying child for the EITC must meet all of the following criteria:
- The child must be under age 19—age 18 or younger—at the end of the tax year OR the child must be younger than you or your spouse (if you file jointly) and under age 24 and a full-time student OR the child was any age and permanently and totally disabled;
- The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew;
- The child must have lived with you for more than half of the tax year (some exceptions apply); and
- The child cannot file a joint return for the tax year unless the child and the child’s spouse did not have a separate filing requirement and filed the joint return only to claim a refund.
Only one person can claim the same child for the same tax year. As for you? You must not be the qualifying child of another person to claim the EITC.
3. You can qualify for the EITC if you are undocumented. No matter what you’ve read on Facebook, illegal aliens are not entitled to refunds because of some tax policy involving ITINs. That’s not true. If you have earned income, you, your spouse and any qualifying child on your tax return must each have a valid Social Security number issued before the due date of your tax return (including extensions) to qualify for the EITC. You must also be a U.S. citizen or resident alien for the entire year. Again, we’ve all seen the stories about folks who aren’t in the country legally snatching up EITC tax refunds, but barring fraud, that’s not possible.
4. EITC refunds are issued immediately. Taxpayers who claim the EITC or Additional Child Tax Credit (ACTC) may have to wait a little longer for their tax refunds that taxpayers who do not claim EITC or ACTC. The IRS must wait until mid-February to begin issuing refunds to taxpayers who claim the EITC or the ACTC. In addition to regular processing times for banks, factoring in weekends, and the President’s Day holiday, the earliest EITC and ACTC-related refunds are expected to be available on or about February 28, 2020; that’s assuming direct deposit and no other issues.
5. The EITC is automatically paid to you even if you don’t file. To qualify, you must meet specific requirements and file a federal income tax return for the tax year even if you do not owe any tax or are not required to file a tax return. This is a common misunderstanding and is one of the reasons why the IRS has over a billion dollars in unclaimed refunds from year to year.
6. A lot of folks are lying to get EITC. Yes, fraud happens. And mistakes happen. But you’d be surprised at the who and the why. According to the Treasury Department, 70% of EITC improper payments (the big ones that get all of the press) are tied to confusion about the rules. The most confusing? Residency and relationships, usually those that involve child custody, divorce, and other issues related to who can claim a child in non-traditional family arrangements. That’s why a 2017 study found that most improper EITC-related payments were the result of mistakes, not intentional actions.
7. You don’t qualify for the EITC.* Okay, this one is tricky. I actually don’t qualify for the EITC – and you may not, depending on your income and family size. But the IRS estimates that four of five eligible taxpayers claim and get the EITC. Last year, 25 million taxpayers received over $61 billion in EITC. The average EITC amount received was $2,504.
8. It’s expensive to file for the EITC. The rules for the EITC can be tricky to navigate. Special rules apply to members of the military, ministers, members of the clergy, those receiving disability benefits, and those impacted by disasters. Some age restrictions may also apply. These bits mean that it makes sense to ask for help, and it doesn’t have to be expensive. Free tax preparation help is available online and through volunteer organizations – even for EITC taxpayers. Consider options like Free File (free brand-name tax software); Free File Fillable Forms; Free tax preparation sites (you can find one using the IRS app or call toll-free 1.800.906.9887); or use a trusted tax pro.
And if you’ve been reading my work for a while now, you know that I’m not a huge fan of the EITC. I don’t think the Tax Code is necessarily the best way to advance social policy. But, love it or not, it is one of the easiest ways to put extra money in the pockets of workers and it’s already on the books: no extra work involved. Taxpayers earning $55,952 or less can see if they are eligible using the EITC Assistant tool at IRS.gov/eitc. The EITC Assistant, available in English and Spanish, helps users determine if they are eligible and if they have a qualifying child or children, and it estimates the amount of the EITC they may get. If an individual doesn’t qualify for the EITC, the Assistant explains why. For help, click over to the EITC Assistant on the IRS website or check with your tax professional.