For the 2021 tax year, the IRS is expanding eligibility for the Earned Income Tax Credit (“EITC”), an important anti-poverty measure that assists those with low incomes either avoid paying taxes altogether, or in some cases, offering those individuals tax refunds that they would not have otherwise received. One key impact of these changes is that more people without children, many of whom are also people with disabilities will also qualify. Traditionally people with disabilities have left money on the table by assuming they would not qualify for the EITC.
But how does the EITC work? Simply put, if you file taxes and your earned income is below a certain level, you can apply the EITC to the amount of federal taxes you owe. (Emphasis added) As mentioned above, the credit may not only result in paying no taxes, but in receiving a tax refund from the IRS.
In a recent statement, IRS Commissioner Chuck Rettig said “There are important changes to the EITC that will help this credit reach more hard-working families this year.” Mr. Rettig went on to say, “We urge people potentially eligible for this valuable [tax] credit to review the guidelines; many people each year overlook this and leave money on the table.”
People with disabilities, especially those without children, have traditionally overlooked the EITC for various reasons. According to the IRS, many eligible people miss out on the EITC because they fall below the income threshold that requires individuals to file taxes, even though they can still file and possibly get the credit. Others incorrectly believe that receiving the EITC will jeopardize their eligibility for other government benefits. Refunds received from the EITC are not considered income for the purposes of means-tested government benefits such as Medicaid, SSI, Supplemental Nutritional Assistance Program (“SNAP”) benefits, Section 8 Housing, or other programs with maximum income limits. To that end, income from SSI, Social Security Disability Insurance (“SSDI”), and certain military disability benefits are not considered “earned income.”
Maximum Credit Triples
For the 2021 tax year, the EITC is available to individuals nineteen (19) years and older, without qualifying children (dependents) and who receive less than $21,430 in earned income that tax year. Married couples filing jointly qualify for the EITC by receiving no more than $27,380.00 in earned income that tax year. This limit is increased depending on the person’s filing status and the number of qualifying children (dependents) in the person’s household. For example: a married couple filing jointly with three qualifying children may qualify for the EITC if their 2021 earned income fell below $57,414.00. While in the past, the EITC was only available to people between ages twenty-five (25) and sixty-four (64), now those sixty-five (65) and over can claim the credit if they have earned income that meet the standards outlined above. Additionally, those nineteen (19) and over can claim the credit if they meet the standards outlined above.
Taxpayers may claim a child with a disability of any age to get the credit if the person meets all other EITC requirements. For tax year 2021 only, the IRS has also lifted the child requirement, so that the maximum EITC for filers with no children is $1,502.00, almost three times more than the 2020 maximum of $538.00.
Here is another example of how the credit might work for a single person: John Doe is fifty (50) years old, single and works part-time, earning $12,000 in 2021. This is just under the current income threshold required to file taxes. However, if John does file for the 2021 tax year and claims the EITC, he should receive a refund of $1,439.00, according to the tax calculation tool on Tax Outreach’s Earned Income Tax Credit Estimator (https://www.taxoutreach.org/help/). If John earned $15,000 last year, he will be eligible for a $980.00 credit, according to the same calculator.
What is Earned Income?
Aside from wages, salaries, and tips, earned income includes earnings from work-for-hire contracts and self-employment, as well as payments from employer-provided disability benefits until the recipient reaches “minimum retirement age,” meaning the age the individual could have started receiving a pension or annuity from their former employer. Investment income is also a factor, although for 2021 only, the IRS is capping this figure at $10,000.00. So if your earned income falls below the threshold, and you can also claim less than $10,000.00 in interest and gains on investments, you could still qualify for the EITC.
It is just as important to know what does not count as “earned income.” Examples include Social Security (retirement), pensions and annuities, unemployment insurance, EITC refunds, and income from such government benefits programs such as SSDI, SSI and certain military disability benefits. In addition, disability income claims from private insurance policies under which the individual taxpayer pays the premium is not considered “earned income.”
If you think you might qualify for the EITC, especially if you or a family member has a disability, it may literally pay to look over the IRS changes carefully as you prepare your tax return for 2021! Our Special Needs attorneys at Mandelbaum Barrett PC are available to answer any questions you may have.