Here is an overview of changes contained in the recent COVID relief legislation (the 2021 American Rescue Plan Act, or ARPA) that improve and expand the earned income tax credit (EITC).
Expansion of EITC for Taxpayers with No Qualifying Children
For tax years beginning in 2021 only, ARPA expands and increases the EITC for taxpayers with no qualifying children:
Age requirements are broadened. The pre-ARPA requirement that a taxpayer with no qualifying children must be over 24 but under 65 years old to claim the EITC doesn’t apply for tax years beginning in 2021. Instead, under ARPA, taxpayers with no qualifying children (other than students, see below) must be at least 19 years old, and there is no upper age limit.
Students (other than “qualified foster youths” or “qualified homeless youths”) must be at least 24 years old. Qualified foster youths and qualified homeless youths must be at least 18.
Increased maximum amount of credit and increased phaseout amounts. The pre-ARPA EITC for taxpayers with no qualifying children for 2021 could be up to $543 if neither the taxpayer’s earned income nor their adjusted gross income (AGI) exceeded $8,800 ($14,820 for joint filers).
Under ARPA, the 2021 EITC of a taxpayer with no qualifying children can be as much as $1,502 if neither the taxpayer’s earned income nor their AGI exceeds $11,610 ($16,610 for joint filers).
Individuals May Base Their 2021 EITC on 2019 Earned Income.
The EITC equals a percentage of the taxpayer’s “earned income” for the year—wages, salaries, tips, and other compensation, as well as self-employment income. Under ARPA, in determining their EITC for 2021, taxpayers may use the greater of their 2019 or 2021 earned income.
This ARPA change applies only to the 2021 tax year. For joint returns, the taxpayer’s earned income for 2019 is the sum of each spouse’s earned income for 2019.
Taxpayers May Have Up to $10,000 of “Disqualified” (Investment) Income and Still Claim EITC
Under pre-ARPA law, a taxpayer who had “disqualified income” (certain types of investment income) over an inflation-adjusted amount ($3,650 for 2021) for the year could not claim the EITC. Under ARPA, the threshold amount for disqualified income increases to $10,000, effective for tax years beginning after 2020. This $10,000 amount will be adjusted for inflation after 2021.
EIC Available Even if Identification Requirements Not Met
The EITC cannot be claimed for a qualifying child unless the taxpayer provides the qualifying child’s name, age, and taxpayer identification number (TIN—generally, a Social Security number). A pre-ARPA rule said that a taxpayer who would have been able to claim the EITC for a qualifying child, but couldn’t do so because the above identification requirements weren’t met, couldn’t claim the EITC that applies for taxpayers with no qualifying children.
ARPA removes that rule, effective for tax years beginning after 2020. This means that if an otherwise eligible individual has qualifying children, but cannot provide proper identification for them, the individual is eligible for the EITC that applies for individuals who have no qualifying children.
EITC Rules, Under Which Certain Separated Married People Need Not File Jointly, Are Liberalized
One requirement for claiming the EITC, that applies subject to exceptions, is that married taxpayers must file jointly. Pre-ARPA law provided an exception to the joint-return-filing requirement for individuals who were married but separated, and who met certain requirements, including living with a qualifying child and not living with the spouse during the last six months of the tax year.
Effective for tax years beginning after 2020, ARPA liberalizes the rules under which certain separated married people need not file jointly to claim the EITC. Under these new rules, as an alternative to meeting the requirement that the spouses not live together for the last six months of the year, if the taxpayer has a decree, instrument, or agreement (other than a decree of divorce) and is not a member of the same household with his or her spouse by the end of the tax year, a joint return need not be filed (assuming the other requirements, such as having a qualifying child, are met).
Application of the Earned Income Tax Credit to U.S. Possessions
Before ARPA, the EITC was not available to individuals in the following U.S. commonwealths and territories: Puerto Rico, U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa.
Under ARPA, beginning in 2021, the EITC will apply in the above commonwealths and territories.
Please contact Larson & Company if you would like more information about these new provisions.
Source: Thomson Reuters 03-17-21