IRS changes guidance on EITC

Accounting

The Internal Revenue Service has updated its frequently asked questions page on the 2021 Earned Income Tax Credit, with new information on using prior tax years to calculate the EITC.

In 2021, more people without children were able to qualify for the EITC, thanks to a provision in the American Rescue Plan Act. In addition, families can now use pre-pandemic income levels to qualify if it results in a larger credit.

The EITC helps low- to moderate-income workers and families by allowing them to claim a refundable tax credit to either reduce the amount of taxes they owe or an added payment to increase a tax refund. The amount of the credit can change depending on whether a taxpayer has children or other dependents, is disabled or meets other criteria.

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Internal Revenue Service headquarters in Washington, D.C.

Samuel Corum/Bloomberg

The FAQ page provides details on what the EITC is, how it was expanded for 2021, which taxpayers are eligible, and how to claim it. On Wednesday, the IRS revised one of the questions on the page. Question 15 asks, “Can I elect to use my 2019 earned income to figure my Earned Income Tax Credit for 2021?” The answer is yes. For 2021, eligible taxpayers can choose to calculate the EITC using their 2019 earned income if it was higher than their 2021 earned income, even if they didn’t have any earned income in 2021. In certain cases, this option would result in a larger credit.

“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.

However, that’s not true for other years. The IRS noted that taxpayers may not use their 2020 earned income to calculate the EITC on their 2021 return.

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