 Income tax 2021-2022. Earned income tax credit the EIC Overview. Get ready to get refunds to the max diving into Income Tax 2021-2022. Most of this information can be found in the Form 1040 Instructions Tax Year 2021 IRS website IRS.gov. Income tax formula down here in the credit area noting that credits and deductions both good for taxes. But if you had a dollar credit versus a dollar deduction the credit would typically be better because you'd get the full credit as a benefit as opposed to the deduction, which would be decreasing the taxable income by that dollar the tax then being opposed on that taxable income. Also note that when we're thinking about credits we can break them out into two general categories. Those being the non-refundable credits, the refundable credits, the non-refundable credits basically can't bring the tax liability below zero, whereas the refundable credits basically can and at that point it wouldn't really be a refund although possibly called a refund because it would be kind of like a benefit program. At that point in time some credits will have a non-refundable and refundable portion to them. The earned income tax credit is one of the biggest refundable type of credits that there is. Page 2 of the Form 1040 down in the refundable area line 27 the earned income tax credit the EIC. What is the EIC? It's the earned income tax credit and the earned income tax credit is a credit for certain people who work. The credit may give you a refund even if you don't owe any tax or didn't have any tax withheld. Let me give you the quick recap of the earned income tax credit overview and why many people including economists like the earned income tax credit, even though it's quite complicated to calculate and it's quite complicated to explain. So it's basically kind of a benefit program that's for low to moderate taxpayers and families that goes through basically the tax code. It's trying to avoid some of the problems of many benefit programs which are of course and justifiably generally being based on income levels. So as income goes up typically benefits go down. One of the problems however is that as the as income goes up people become less dependent on the benefit programs. If the program gets completely pulled away then the loss of the benefit program can often outweigh the benefits they're getting from basically the income which actually locks people in once they're dependent on the benefit programs to not becoming independent because once they do so they lose the benefit programs before they're really ready to be able to be independent from them. So what you'd like to do is have some kind of benefit program in place that doesn't disincentivize or lock people into being dependent on the program and not being able to get to a point of independence from the program. One way you can try to do that is to give incentives for people that have worked, people that have earned income. So the earned income tax credit is a credit that's actually going to go up as your earned income goes up in an attempt to incentivize people to have earned income, the most common kind of earned income being basically like W2 income and then of course it'll peak out at some point in time and go back down. So the hope is that that actually gets the benefit that is needed and it incentivizes people to do work. That's kind of why economists like it. However it's quite complex to calculate because there's a couple different things involved in it. It's commingled with the amount of children that are involved. So the number of children between zero and three could have an impact on the calculation of the credit. And you can imagine that if it's based on earned income then we have to determine what is earned income. Obviously W2 income is earned income. What about other types of income do you have to include it or not? And what about so types of income like Schedule C income and so on? Which types of incomes calculate for the earned income? And then of course you have to have different tables that are going to have the credit go up and then back down based on these factors such as filing status, married, single, head of household and number of children. So it can be quite complicated to calculate and in this pandemic type of situation we also have added the possibility of taking the prior year's earned income into consideration. Again that's an added complication. So tax software is really helpful to calculate the earned income tax credit and then you can kind of like deconstruct it to some degree to understand what is going on with it which we'll take a look at here. You may elect to use your 2019 earned income to figure their EIC if your 2019 earned income is more than your 2021 earned income for Detail C Publication 596. So this was the whole issue with the pandemic and kind of like the downturn from it where people with justification for this would be like the government saying well we want to incentivize someone to have earned income but they might not have the capacity during this time period to take the same jobs they would have had before the problem happened. So we're going to allow you to take the 2019 if it's greater than your current income. Why would you ever want to do that because normally income is bad for taxes if you have to recognize income on the tax return you might have to owe taxes on it but as we said with the earned income credit it could be good for the calculation of the credit because your credit will actually go up as your earned income goes up to a certain threshold. So that again another level of kind of confusion tax software is really helpful to do those calculations. You can't use your 2020 earned income instead of your 2021 earned income. Again a bit confusing here because I think the justification is they're going back to 2019 which is kind of before the whole issue was taking place is the idea but that's a little ways back that you got to go back and kind of figure what that prior income is that you can possibly take in to the current system and last year of course they had a similar thing but it was the prior year it wasn't going back two years back so now we've got situations where the tax code is kind of changing each year in kind of weird ways so which makes it inconsistent which makes it kind of confusing to people so you can also use your 2019 earned income if it is more than your 2021 earned income. If you make the election to use your 2019 earned income to figure your EIC enter your 2019 earned income in line 27C. To take the EIC follow the steps below. Complete the worksheet that applies to you to let the IRS figure the credit for you. If you have a qualified child complete the attached schedule EIC. If you have at least one child who meets the conditions to be your qualified child the purposes of claiming the EIC earned income credit complete the attached schedule EIC even if that child doesn't have a valid social security number. So you can claim the credit if you don't have any child any children but then or dependents child qualifying children but it'll typically be much lower of course it'll the brackets or the amount or calculation of the credits will typically go up if you have the qualifying children up to basically three children where it basically caps out is the general idea. So you can see schedule EIC for more information including how to complete schedule EIC if your qualifying child doesn't have a valid SSN social security number. Line 27A checkbox a qualifying former foster youth must consent for entities who administer a plan under Part B or Part E of Title IV of the Social Security Act to disclose information related to their status as a qualified former foster youth. This consent is given by checking the box online 27A. Qualified homeless youth are required to certify that they are unaccompanied homeless or at risk of homelessness and self-supporting by checking the box online 27A for help in determining if you are eligible for the EIC earned income credit go to the IRS.gov forward slash EITC and click on the EITC qualification assistance this service is available in English and in Spanish caution if you take the EIC earned income credit even though you aren't eligible and it is determined that your error is due to recklessness reckless or intentional disregard of the EIC rules you won't be allowed to take the credit for two years even if you are otherwise eligible to do so so the earned income tax credit because it's a refundable credits and because it's substantial in dollar amount there's going to be a lot of fraud that's related to it so they got to try to pin down the people making false claims for the earned income credit in some way and they could restrict one way is to basically restrict the claims in the future so if you fraudulently take the EIC you won't be allowed to take the credit for ten years so notice you've got the kind of like the gross negligence versus the fraud obviously they kind of have to prove this in some way and this happens to a lot of items in the law where intention comes into play so they kind of try to determine whether it was like just negligence that was gross negligence or if it was an error usually in the law then it's not as bad but if it's reckless error then or intentional disregard then that has more of that's more on you right and then if it's complete fraud meaning you're basically lying then that's going to be more severe so c-form 8862 who must file later you may also have to pay penalties so tip refunds for certain are claiming the earned income credit can't be issued before mid-February 2022 so they often have to basically take a little bit longer than to get the refund out because once again they're trying to stop people from committing fraud with it I believe is the justification so it takes them a little bit longer to process these returns with these big refundable credits in them which are kind of bait or a lot of people might look at them as an opportunity to commit fraud so this delay applies to the entire refund not just the portion associated with the earned income credit now the question we're always going to get is well how much will the credit be and this is going to be a complex questions because it's going to be dependent on many different things including how many qualified children there are from zero up to three the marital status single or married for example as well as the amount of the earned income that is involved and we actually want to kind of visualize it as more of a curve meaning in each of these categories we can imagine then the credit going up as earned income goes up and then capping off at some point the maximum credit for that category of number of qualified children and filing status and then it's going to go back down as the earned income goes up so we can kind of visualize it basically as different curves based on different combinations of the qualified children and filing status so let's first think about the maximums these are the peaks of the curves if your earned income was at the perfect level so we got the maximum credits then so no qualifying children you can still get the credit but you know the curve is going to be lower it's going to maximize at the one thousand five oh two and then we have one qualifying child it maxes out at the three six one eight that's the maximum of the curve or the maximum credit if we compare that to the level of the earned income and then two qualifying children five thousand nine eighty with three qualifying children three or more qualifying children so it caps out at three six thousand seven twenty eight notice you got to be careful when you're filing married filing separate because the iris is going to be skeptical when people are taking like credits like this one so that you want to check into that in more detail if you're married and decide to file married filing separate so up top then we have our table here we got the children or relatives of that are claimed we've got from zero to three we've got the maximum AGI so that's going to be basically an income threshold filing as a single head of household widowed or married filing separately and then we have the maximum AGI for filing married filing jointly so if there are no children involved and we're filing basically non married then the income could go up to fairly low threshold of the twenty one thousand four thirty now that's not where you get the peak or that's not where you're going to get the max credit at that level that's not the top of the curve of the one thousand five oh two credit that you're going to get that's where the curve basically ends meaning it already peaked out as your income went up to one thousand five oh two and then went back down to zero after you get past the twenty one four thirty if married and no no qualifying children then it's at the twenty seven three eighty if we've got one child involved and basically non married then the AGI can be as high as forty two one fifty eight again that amount does not represent the amount at which you'll get the maximum credit for that category of the three thousand six eighteen that's where basically as your as your income goes up it capped out and then it went back down to be zero past this point and if married if married then and one qualifying child forty eight one oh eight is passed where you get any of the benefit if you have to two children then non married it can go as high as the forty seven nine fifteen and again that doesn't mean that at that income level you're going to get the max credit of the five thousand nine eighty it means that as your income goes up it's going to it's going to the credits going to go up and cap at the five thousand nine eighty and then it's going to go back down back down to zero after you get past the forty seven nine fifteen if married married filing joint it's at the fifty three eight sixty five and if you have the three children qualifying children or more non married then the income threshold is as high as fifty one four sixty four that's not where you're going to get the maximum credit at the six thousand seven twenty eight as your income goes up your income your credit will go up to max out at the six thousand seven twenty eight and then we'll go back down as your income level goes up and you will not get any credit after you reach the point of the fifty one four sixty four if married filing joint it's at the fifty seven four fourteen notice here that you could see that when you're looking at the married filing joint it's not like they doubled the income for this particular credit which is kind of interesting you know the play between non married and married and the AGI thresholds but in any case we'll try to get a better grasp of that by looking at basically the tables and then doing some scenarios and tax software and test out these limitations to get a better feel for them.