The earned income tax credit (EITC) is not for every taxpayer. As your income increases, the credit is reduced and it is phased out at an income threshold. Many taxpayers who illegally claimed the earned income tax credit are receiving letters from the Internal Revenue Service.

Taxpayers should be more vigilant by looking for any schedule A or Schedule C on their tax return if they are not self employed, did not receive a Form 1099, and did not have high mortgage interest and other legal deductions. Tax returns with schedule A and schedule C face more scrutiny than ever before . The statute of limitations is 3 years for most of the cases where taxpayers illegally claim the earned income tax credit (EITC).

The earned income tax credit is a refundable tax credit that an eligible taxpayer may claim based on a percentage of the individual’s earned income and the number of dependents who are qualifying children. To qualify for the earned income credit some requirements must be met. You must have earned income like wages, salaries, tips, net earnings from self employment, and other employee compensation. Earned income, generally, does not include:

  • Unemployment benefits
  • Alimony
  • Child support
  • Payment you received for work when you were an inmate in a penal institution
  • Interest and dividends
  • Pensions or annuities
  • Social Security

It is not accurate when a tax preparer, an advertising material, a family member, a friend, or acquaintance claims that you get a specific amount for your child or children. The amount of the credit is based on your specific tax and financial situation. This tax year 2020, taxpayers could claim a maximum of the earned income credit:

  • No qualifying children: $538. Note that taxpayers must be 25 years old and less than 65 years old.
  • 1 qualifying child: $3,584
  • 2 qualifying children: $5,920
  • 3 or more qualifying children: $6,660

In many cases, some taxpayers who can claim the EITC overlook this credit. The list includes taxpayers:

  • Without children
  • Living in non-traditional families, such as a grandparent raising a grandchild
  • Whose earnings declined or whose marital or parental status changed
  • With limited English language skills
  • Who are members of the armed forces
  • Living in rural areas
  • Who are Native Americans
  • With disabilities or who provide care for a disabled dependent

Each individual in the tax return must have a valid social security number to claim the earned income credit (EITC). An individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN) may not be used.

Further reading:

  • Internal Revenue Code (Sections 32, 87, 173, 895, 923, 2402, 2403, 2410, 6402(m).

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