What is the Earned Income Tax Credit (EITC)? How Does Unemployment Income Impact It?

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The Federal Earned Income Tax Credit (EITC) exists to help working Americans of modest income. In 2019, 25 million taxpayers received a total of $63 billion in EITC funds. The average amount a family received was just over $2,400. It’s a good chunk of money, and many families count on it to make ends meet.

How the EITC is different this year

Did you earn less in 2020 than 2019? You could qualify for a bigger tax refund! Congress approved a new “lookback rule” which means you can use either your 2019 or 2020 income on your taxes to get the biggest refund possible this year. Make sure you have your 2019 tax return available when you do your taxes this year.

If you receive the EITC, how does unemployment income impact that credit?

You may have heard me say this before regarding many personal finance questions, but the answer is: It depends.

In 2020, a lot of Americans received unemployment, particularly after the CARES Act extended unemployment benefits.

Note: This discussion assumes you are qualified to receive EITC. Explore whether or not you are qualified.

Here’s the bad news. Unemployment income will not increase the EITC you receive, because the tax code does not recognize unemployment income as earned income. And if you have received unemployment during the COVID-19 pandemic, you may owe taxes on that income. Check with your tax preparer to make sure.

Being unemployed in 2020 may reduce the EITC you receive. Knowing exactly how unemployment income will affect your EITC depends upon your specific circumstances.

How to calculate your exact EITC

To calculate precise numbers, use the IRS EITC Assistant. To use this tool, you’ll need to know your income and your tax withholding or taxes paid. You’ll also have to know any expenses or adjustments to your income that may occur. Having your prior year tax return available may be helpful.

Another option is to find a 2020 EITC calculator online. Just be aware, not all calculators differentiate between different types of income. So if you do have earned income and unemployment, they may not give an accurate number, depending on what side of the EITC “curve” you are on.

It’s a lot of information, and there are many nuances, but knowing these details will help you maximize your tax return. Knowing helps planning, and planning helps you have better finances. And we all like better finances!

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