Tax Alert: IRS Updates 2021 Earned Income Tax Credit Guidance

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On May 25, the Internal Revenue Service revised its Frequently Asked Questions (FAQ) page for the 2021 Earned Income Tax Credit (EITC) to inform taxpayers of changes to how they can claim the credit on their 2021 federal income tax returns.

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The change relates to the use of pre-pandemic revenue to file an EITC application. Question 15 asks: “Can I choose to use my earned income in 2019 to calculate my earned income tax credit for 2021?”

Unlike previous years, the answer to this question is yes. You can choose to use your earned income in 2019 to file for an EITC if it was greater than your earned income in 2021 and you haven’t filed or applied for the EITC in the past two years . You cannot use your 2020 income to claim the EITC on your 2021 tax return.

Signed into law by President Joe Biden in 2021, the American Rescue Plan Act (ARP) made the EITC available to more beneficiaries than ever before. This update to the guidelines may help more people claim a higher amount of credit based on the credit earned by taxpayers in 2019 and 2021. Or it may increase the amount of a refund, according to Accounting Today.

“Taxpayers who did not file a return for the 2020 or 2021 tax year or who did not claim the earned income tax credit on their 2020 or 2021 return because they did not have no income earned in those years can file an original or amended return to claim the Earned Income Tax Credit Income Tax Credit using their earned income in 2019, if they are otherwise eligible for do it,” the IRS said.

The EITC is the largest refundable federal tax credit for low-to-moderate income workers and is based on several factors, including family size, filing status, age, and income limits. (both employment and investment). You can apply for the EITC even if your children are not eligible, but there is a different set of eligibility requirements for doing so.

The IRS considers “earned income” to be taxable wages, salaries, net self-employment income, tips, and other taxable labor compensation.

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According to the IRS, 25 million workers took advantage of the EITC, receiving about $63 million in payments in 2019. The average credit was $2,476.

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About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to make a career change in 2016 and focus full-time on all aspects of writing. He recently completed a technical degree in communications and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience writing for the retail industry.

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