Ah, the places I could go if I had an extra $2500 to spend… a warm beach would be pretty good right now. Alternatively, I guess I could do the responsible thing and pump up my retirement savings. According to the IRS, there is a large group of folks out there who could potentially face this rather pleasant dilemma, but they choose not to!
20% of households that are eligible to receive the Earned Income Tax Credit (EITC) fail to apply for the credit when they file their taxes (or they do not file at all). In 2019, 25 million households received an average federal EITC refund of $2,476. In addition to that, 29 states and the District of Columbia have their own EITC program and so many households received even more.
What makes the EITC so valuable is that it is a refundable tax credit. Now, stay with me here. Most tax credits are non-refundable; you owe $1000 in income tax, but you have a tax credit worth $3000. You end up paying zero because the credit is more than what is owed. Not bad at all.
But a refundable credit, like the EITC, is even better. You owe the same $1000 in income tax, the EITC is worth $3000, and the IRS sends you a check for $2000 ($3000 credit - $1000 tax owed)! You receive the full amount of the credit even if it exceeds what you owe.
Repeated research has shown the tremendous value of the EITC on people’s lives and financial wellbeing. Here’s just one finding among many: By freeing up money for child care, single mothers receiving the EITC are more likely to be employed and earn higher wages.
Figuring out your eligibility status for the EITC can be a bit complex, and this is where a lot of errors are made. But the general facts to know are that a household without children is eligible when their adjusted gross income does not exceed $15,570 (or $21,370 for a couple that is married and filing jointly). For a family with children, the EITC maximum income level rises dramatically, up to $55,952. (You can use IRS Publication 5334 to determine if you are eligible for the EITC.)
Part of the complexity of EITC comes from the fact that a person who may qualify as a dependent in one tax circumstance, may not be a dependent for purposes of the EITC. Also, pay attention to the “E” in “EITC.” The taxpayer must have some amount of income from a job or earnings from self-employment, i.e. earned income. Things like investment income, child support, unemployment compensation, Social Security, retirement account distributions, etc. do not count.
The good news is that you don’t have to go it alone. Anyone with a household income below $56,000 can have their return prepared for them completely free by a trained and certified preparer under the Voluntary Income Tax Assistance (VITA) program.
— (You can find a VITA site near you here. ) —
But if you do decide to prepare your own tax return, freely available software at the IRS site can take a lot of the pain out of the process.
What would you do with an extra $2500? If you are entitled to the EITC and not taking advantage of it, you’ll never know!