Filing season kicked off on January 24 this year. Each filing season comes with challenges for taxpayers such as choosing a qualified return preparer, locating a Volunteer Income Tax Assistance (VITA) site, and understanding the issues to address on their tax returns. The Earned Income Tax Credit (EITC) Awareness Day is a one-day national education program to alert taxpayers to the importance of the EITC and teach them how to claim it properly.
The EITC’s significance shows in its numbers: In fiscal year (FY) 2020, over 26 million taxpayers received the EITC, and the average EITC amount was nearly $2,500. In FYs 2018 and 2019, a similar number of taxpayers received the EITC, and that average amount was also nearly $2,500 in both years. It’s certainly a valuable credit for taxpayers, and one which requires careful attention to its details.
New Year, New Law
The American Rescue Plan Act (ARPA) enacted a couple of changes to the EITC. Some are permanent while some are temporary, presently applying only to tax year (TY) 2021 returns.
Let’s start with some of the EITC’s temporary changes, applying only to TY 2021 tax returns:
- Qualified former foster youth and qualified homeless youth who are 18 years old and without qualifying children may claim the EITC. These especially vulnerable taxpayers may be eligible for an EITC refund of $1,502, so long as they meet the EITC’s rules. These rules are discussed on page 42 of the Form 1040 (and 1040-SR) Instructions. We summarize them here:
- Qualified former foster youth are individuals who, between the ages of 14 and 17, were in foster care and who provide consent for the entity or entities who administered the foster care program to disclose information related to their status as a former foster youth. Qualified homeless youth are individuals who certify that they are an unaccompanied youth who is homeless or who is at risk of homelessness, and who is self-supporting.
- Qualified former foster youth and qualified homeless youth who meet these definitions and meet all other requirements to claim the EITC must check the box on Line 27 of the Form 1040. The text accompanying that check box reads as follows: “Check here if you were born after January 1, 1998, and before January 2, 2004, and you satisfy all the other requirements for taxpayers who are at least age 18, to claim the EIC. See instructions.”
- A broader age range of taxpayers who do not claim qualifying children will be able to claim EITC. Previously limited to taxpayers age 25 to those younger than 65, there is now no upper age limit on claiming this credit. Taxpayers as young as 19, if not a specified student, may now claim the EITC. Taxpayers who are students that carry at least half the normal full-time workload for at last five months of the year are specified students and cannot claim the EITC without qualifying children until the taxpayer turns 24 years old. And, as noted earlier, homeless and former foster youth who are as young as 18 are eligible to claim the EITC.
- Choice of year income. Taxpayers will be able to elect to use their TY 2019 income instead of their 2021 income, if their TY 2021 income is lower than their 2019 income. Reflecting COVID-19’s change to employment and earning, this change may enable certain taxpayers to claim a higher EITC amount than if they relied on their TY 2021 income.
- The income plateau and credit amounts for taxpayers without qualifying children expanded significantly. For TY 2021, the EITC for these taxpayers’ plateaus at $1,502 for married taxpayers filing jointly and earning between $9,800 and $17,559, and at the same credit amount for taxpayers with other filing statuses earning between $9,800 and $11,649.
- For taxpayers claiming qualifying children on their TY 2021 return, the EITC plateaus at $6,728 for a taxpayer with three qualifying children who is not filing a joint return and who is earning between $14,950 and $19,549, and at the same amount for married taxpayers filing jointly with three qualifying children and earning between $14,950 and $25,549.
Let’s continue with some of the permanent changes to the EITC:
- An additional category of taxpayers who are married but separated from their spouses may be newly eligible for the EITC. Generally, taxpayers’ filing status must be single, married filing jointly, or head of household to claim the EITC with qualifying children – married taxpayers filing separate returns were not allowed to claim the credit. Now, certain married taxpayers filing separately may be able to claim EITC so long as they:
- Did not live with their spouse during the last six months of the year, or have a separation agreement or decree; and
- Lived with their qualifying child or children for more than one-half of the year.
- The maximum amount of investment income (like interest and dividends) that a taxpayer may have without being ineligible for the EITC was increased from 2020’s cap of $3,650 to $10,000.
- Taxpayers whose qualifying children don’t meet the social security number requirement may be able to claim the EITC as if they were a taxpayer without qualifying children.
Complications, Problems, and Help
The EITC rules are complicated, and EITC audits can be time consuming. In FY 2020, the IRS conducted nearly 158,000 EITC audits. Of these, 16.3 percent were closed as “no change”, 23.5 percent closed as “taxpayer default”, 34.8 percent were closed as “with no response from the taxpayers”, and only 464 petitioned the U.S. Tax Court. The IRS closed nearly 100,000 more EITC audits in pre-pandemic FY 2019. That year, the IRS conducted almost 257,000 EITC audits. Of these, 13 percent closed “unchanged”, 26.8 percent closed as “taxpayer default”, and 939 taxpayers petitioned the U.S. Tax Court.
The IRS has posted information and developed tools to assist taxpayers undergoing an audit in order to facilitate accurate audit responses. These web tools are beneficial, especially because the IRS is slow to respond to taxpayer calls. As I discuss in my 2021 Annual Report to Congress, the IRS’s telephone service is woefully inadequate, hovering at a level of service of 21 percent across its phone lines in FY 2021. In that fiscal year, the IRS received about 282 million telephone calls. Customer service representatives answered only about 32 million, or 11 percent, of those calls. Those corresponding with the IRS about an EITC audit may also feel frustrated.
As I also discuss in my 2021 Annual Report to Congress, the IRS had approximately 4.75 million pieces of taxpayer correspondence in its backlogged inventory in mid-December 2021.
Help is available to eligible taxpayers:
Learn more from an EITC Awareness Day event near you. TAS will be hosting or participating in EITC Awareness Day and other pre-filing season events to ensure taxpayers understand the EITC and can properly claim it. IRS.gov contains many tools and resources to assist taxpayers with EITC qualification and benefits.
Remember to avoid processing delays:
- Make every effort to file your return electronically;
- Provide your bank routing information;
- Request direct deposit for your refund; and
- Triple check entries on your return for errors.
Errors or inconsistencies with IRS records will cause delays in processing.