Tax Alert: IRS Updates Guidance on 2021 Earned Income Tax Credit

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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 concerns using pre-pandemic income to file an EITC claim. Question 15 asks: “Can I elect to use my 2019 earned income to figure my Earned Income Tax Credit for 2021?”

Unlike previous years, the answer to this question is yes. You may elect to use your 2019 earned income to file an EITC claim if it was higher than your 2021 earned income and if you did not file a return or claim the EITC in the last two years. You cannot use your 2020 income to apply for the EITC on your 2021 tax return.

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Enacted by President Joe Biden in 2021, the American Rescue Plan Act (ARP) made the EITC available to a greater number of recipients than it was previously. This guidance update may help more people to claim a higher credit amount depending on taxpayers’ earned credit 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 tax year 2020 or 2021 or who did not claim the Earned Income Tax Credit on their 2020 or 2021 return because they had no earned income in those years may file an original or amended return to claim the Earned Income Tax Credit using their 2019 earned income, if they are otherwise eligible to do so,” said the IRS.

The EITC is the largest federal refundable tax credit for workers earning low to moderate incomes and is based on several factors including family size, filing status, age and income limits (from both employment and investments). You may apply for EITC even if your children do not qualify but there is a different set of eligibility requirements to do so.

The IRS considers “earned income” to be taxable wages, salaries, net earnings from self-employment, tips and any other taxable work pay.

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According to the IRS, 25 million workers took advantage of the EITC, receiving approximately $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 change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma 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 copywriting for the retail industry.

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