All you need to know about the Earned Income Tax Credits

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For those of you who don’t quite understand the EITC should take a closer look because it might give you a good tax break. The Earned Income Tax Credit is a refundable tax credit available to families with low to moderate-income. This means that you will get a tax refund even if you have a tax bill that says $0 owed. The last year has seen a good number with 25 million lucky taxpayers who received tax refunds worth $61 billion in EITC.

We urge all the followers of the MyTaxFiler, who earned $55,952 or less in 2019, to check if they qualify for the EITC. Also, let there be no ambiguity – the EITC is available if you work for someone else or are self-employed.

To find out if you qualify for the EITC, you shall use the EITC Assistant by visiting the IRS website. Visiting the site will help you better understand the EITC because it is complex, and there are special rules applicable to this tax credit. 

There are many ways to get your EITC right and file your taxes seamlessly. You can either opt to use the IRS Free File, choose a trusted tax professional, or visit a free tax preparation site.

Let us look at a few facts that will help you understand the Earned Income Tax Credit better and points to keep in mind while claiming it. 

Credit Limits for Tax Year 2019

The credit limit for the tax year 2019 depends on your filing status, income, and family size. If you qualify, you may earn a credit of up to:-

  • $529 – In case you have no qualifying children
  • $3,526 – In case you have one qualifying child
  • $5,828 – In case you have two qualifying children
  • $6,557 – In case you have three or more qualifying children

FYI, the average amount of EITC was $2,504 in the previous tax cycle. 

Factors that qualify you for EITC

The following factors are considered for eligibility of the EITC:-

  • You earned income and adjusted gross income must come within a certain income limit and meet basic rules of the tax credit. 
  • You must meet all the rules if you don’t have a qualifying child.
  • If you have a qualifying child/ children, then you must meet all the qualifying child rules.

One taxpayer – One Qualifying Child

The heading makes it quite clear. If your child is a qualifying child, then only one person can claim them on their tax return under the EITC. 

Another highlight is that if a child qualifies for both the parents and a non-parent, then the non-parent shall have a higher AGI than either of the parents to claim the child under EITC. 

On the application of tie-breaker rules, the person not claiming the qualifying child has the option to claim the EITC without qualifying the child if they qualify all the special rules and eligibility criteria. 

Combat pay is normally exempt from tax and not included in AGI

Under the EITC special rule, if you receive combat pay, then you may wish to count it as taxable income for figuring the amount of EITC. Usually, combat pay is exempt from taxes, and doing so may or may not increase the amount of EITC. 

We encourage you to check the credit estimate by adding and without adding combat pay and make the most of the Earned Income Tax Credit. Also, if you face a specific type of income disability or are a member of the clergy, then there will be special rules applicable in your case. 

Social Security Number – A must for everyone on the tax return

The most important thing to take care of before filing your income tax returns or claiming the EITC is ensuring you, your spouse (if filing jointly), and any qualifying child/ children shall have a valid SSN. 

For most of you, the tax filing deadline or the tax day is dated April 15, 2020. Some of you may be granted an extension up till October 15, 2020, by filing an automatic extension request with the IRS before the tax day. Remember, there are special rules applicable to members of the military and U.S. taxpayers staying abroad. 

Refund Timelines for EITC and ACTC Filers

The IRS cannot issue any tax refunds to taxpayers claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) before the mid of February. The rules require the IRS to hold off the entire amount of tax refunds, including refunds, not part of the EITC or ACTC. The extra time helps the IRS to ensure that everything is in place and helps them detect and avoid tax errors and frauds. 

You may use the feature ‘Where’s My Refund’ available on the IRS website or the IRS2Go app to check the updated deposit dates of your EITC and ACTC refunds by February 22, 2020. Therefore, do not panic if you don’t see your refund date for a few days after February 15, 2020. 

You can, however, expect to receive your tax refunds in the first week of March in your bank accounts, Debit, or Credit cards if you choose the option of Direct Deposit and have no error on your tax return. 

Double-check your tax return before filing

You are responsible for the accuracy of your tax returns, even if you get them filed by someone else. Any error, whatsoever, may require you to amend and file again and also cast a hefty tax penalty on you. You should be more careful if you are planning to claim the EITC because it’s complicated, and many taxpayers commit mistakes while claiming it. Some of the common errors include,

  1. Many taxpayers claim a child who does not qualify all the four tests to be eligible for the EITC, i.e., Age, Residency in the U.S., Relationship, and Joint Return.
  2. Another common mistake is filing as a single head of the household when married.
  3. Error in the income or expense amount reported.
  4. Missing or incorrect Social Security Number of individuals mentioned on the tax return.

Repercussions of filing an EITC with an error

There are repercussions if you get your EITC incorrect or with an error while filing your tax return. A few things which may happen in this case include,

  1. A delay in receiving the EITC part of the refund. The delay may last for a few months until the IRS corrects the error on the tax return. 
  2. The IRS may deny all or part of your EITC. In this case, you may be required to do the following, 
  • Return the amount of EITC received in error along with interest.
  • File Form 8862, which is used to claim certain tax credits after disallowance, to claim the EITC again. 
  • You may be barred from claiming the EITC for the next two years if it is found that the error caused was because of recklessness or disregard for the IRS rules. 
  • You may be barred from claiming the EITC for the next ten years if the error is found to be a result of an attempt of fraud.

How to Claim the EITC

You would need to fill the Form 1040 to claim the EITC. If you are claiming the EITC with a qualifying child, then you would need to attach the Schedule EIC with the tax return. 

The Schedule EIC provides the IRS with all the necessary information about the qualifying child or children, including their names, ages, relationship with you, SSNs, and the amount of time they lived with you during the year.

Don’t worry if you receive a letter from the IRS

You may receive a letter from the IRS seeking additional information to process the tax refund. Don’t panic and promptly send all the information asked by the IRS, leaving no room for any errors to avoid further delaying your tax refund. 

If in case, you require more time to respond to the IRS mail, then you call on the number mentioned on such mail communication and request an increased timeline to submit the necessary documents.

Conclusion

The EITC is a beneficial tax credit for families with low to moderate-income who have children. The tax credit aims to ease the life of many such taxpayers by reducing their tax liabilities and giving them refunds even on a zero tax bill. The EITC is newly introduced and complex, which calls for due care while claiming it to avoid unnecessary tax time hassle. To understand all the aspects of the EITC and your eligibility, you can contact your MYTaxFiler expert and make the most of your federal income tax refunds. Contact right away or before the tax day and enable us to help you better and save big on your tax returns. 

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