Special Rules Apply to 2020 Earned Income Tax Credit and Child Tax Credit

Because of the pandemic, many individuals have seen their employment (earned) income plummet. In that situation, two very important tax credits, the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) (which are based in part on earned income), will be adversely affected, hitting lower-income taxpayers with a double whammy.

Not wanting those who normally rely on these credits to make ends meet to suffer further economically, Congress came up with a special way to calculate the two credits for 2020. When figuring these 2020 credits, taxpayers are allowed to use the amount of their 2019 or 2020 earned income, whichever produces the better result. This will only affect the computation of the EITC and CTC and does not impact the gross income used for determining an individual’s income tax for 2020. The option of using 2019’s earned income is only available if it is higher than 2020s earned income.

Earned Income Tax Credit (EITC) – Many years ago, Congress established the EITC as an income supplement for working individuals with lower-paying employment. If you qualify, it could be worth as much as $6,660 in 2020. It is a refundable credit.

As mentioned above, the EITC is based on the amount of your earned income for 2019 or 2020 (income from work for wages and/or self-employment) and whether there are qualifying children in your household. Qualifying children are those who live with you for over half the year, are related, and are under the age of 19 (or full-time students under the age of 24). The credit increases, up to a point, as your earned income increases. The table below shows the earned income at which the maximum credit is achieved for 2020.

Qualifying Children Earned Income Maximum Credit
None $7,030 $538
1 $10,540 $3,584
2 $14,800 $5,920
3 or more $14,800 $6,660

The credit amount phases out after reaching the maximum based on filing status and the number of qualifying children. The 2020 phase-out ranges are shown in the table below.

Qualifying Children Filing Status Phase-out Range
None Married Filing Jointly $14,680–21,750
Others $8,790–15,820
1 Married Filing Jointly $25,220–47,646
Others $18,030–41,094
2 Married Filing Jointly $25,220–53,330
Others $19,330–47,440
3 or more Married Filing Jointly $25,220–56,884
Others $18,660–50,954

There are some additional qualification requirements; you, your spouse (if married and filing jointly), and each qualifying child must have a valid Social Security number (SSN), and you cannot use the filing status “married filing separately.” You cannot be a qualifying child of another person, your investment income for the year cannot exceed $3,650 (2020), and you cannot exclude earned income from working abroad. Also, you and your spouse (if filing jointly) must be U.S. citizens or resident aliens. If you do not have a qualifying child, you must be at least age 25 but under 65 at the end of the year.

With regard to the SSN requirement, note that to qualify for the EITC, everyone you claim on your tax return must have a valid SSN, meaning the SSN must be valid for employment and must have been issued before the due date (including extensions) of the tax return on which you are claiming the credit.

Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates that as many as 25 percent of people who qualify for the credit do not claim it, simply because they don’t understand the criteria. If you qualified for but failed to claim the credit on your return for 2017, 2018, and/or 2019, you can still claim it for those years by filing an amended or original return, if you have not previously filed. However, note the timing for the issuance of the valid SSN as explained above.

Child & Dependent Tax Credit – To aid families with children, the CTC is $2,000 for each qualified child. A qualified child for this tax credit is one who is under age 17 at the end of the year, is related, is not self-supporting, lived with you over half the year, has an SSN that was issued no later than the due date (including extensions) of the return, and is claimed as your dependent. The child must be a U.S. citizen, U.S. national, or U.S. resident alien. In addition, you (or your spouse, if filing jointly) must have an SSN or ITIN (Individual Taxpayer Identification Number) issued on or before the return’s due date (including extensions) to be eligible to claim the credit on either your original or an amended return.

The refundable portion of this credit is equal to 15% of your earned income but limited to $1,400.

You are also able to claim a nonrefundable credit of $500 for each of your dependents who do not qualify for the child credit.

For both the child and dependent credits, the credit begins to phase out for married taxpayers with an AGI of $400,000 ($200,000 for others). If you have questions about these two credits and how the law change might benefit you, please give this office a call at (616) 957-2055.

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