There have been numerous tax law changes in the past year that are affecting how folks file for 2021. In my last two blogs, I talked about the expanded child tax credit as well as tools that can help you properly apply the credit if you qualify. In this blog, I will move on to the changes in the Earned Income Tax Credit (EITC). Most of the changes in the new law expand the EITC for 2021 and future years.
The EITC was originally geared towards families with children and working parents who have low-paying jobs. Households without children could still qualify with income below $15,820 (2020). Those who qualified for the EITC could not be younger than 25 or older than 65 regardless of their income levels.
For 2021 only, more workers will qualify for the EITC even if they don’t have any qualifying children. For taxpayers filing as single, head of household, or widowed, they will receive up to $1,502 credit if their income is below $21,430. For taxpayers married filing joint, the income limit is $27,380. The credit is also available to younger workers (age 19 and older) and older workers as there is no age limit cap. Taxpayers can also choose to use their 2019 earned income if it was higher than their 2021 earned income and provides them with a larger credit.
Starting in 2021, more workers and their families with investment income will also be able to qualify for the EITC. The maximum amount of investment income they can receive and still qualify for the credit is $10,000. The 2020 investment income limit was $3,650. Unlike other changes to the EITC that are available for only 2021, the change regarding investment income is permanent.
Another permanent change is that spouses with a child (or children) who are separated and do not file a joint return may also qualify for the EITC under the new law. Under the prior law, taxpayers with children filing as married filing separate were not eligible for the EITC. To be eligible for the credit, the child must have lived with the taxpayer for more than half of the year and one of the following must be true:
- The taxpayer claiming the credit cannot live with the other spouse for at least the last six months of the year for which the credit is being claimed, OR
- The spouses are legally separated according to their state law and have a written separation agreement or a decree of separate maintenance. They also cannot be living in the same household at the end of the tax year for which the credit is claimed.
Need more help understanding the new EITC rules or any of the new tax rules for 2021? I’m always happy to help! Please reach out so we can talk more.