In tax times, the only thing better than a tax deduction is a tax credit. And if you have low to moderate incomes, the Earned Income Tax Credit (EITC) is indeed a very good thing.
A deduction reduces your taxable income, which in turn reduces your taxes. A tax credit, however, reduces the amount of tax you owe, dollar for dollar. If you owe $700 in taxes and get a $500 tax credit, your tax bill will go down to $200.
The EITC is a refundable tax credit, which means you get the full credit, even if the credit is more than the amount of tax you owe for the year. If you owed no income tax and had an EITC of $500, for example, you would get a refund of $500.
As the name suggests, you must have earned income to get the EITC. Earned income is money you earn working for someone else, yourself, or a business you own. Alimony, interest and dividends, pension payments or social security benefits do not count.
Also, you must:
- Have investment income of less than $10,000 in the 2021 tax year
- Have a valid social security number
- Be a U.S. citizen or resident alien for the full year
If you don’t have dependent children, you must have lived in the United States for at least half of the 2021 tax year, and you cannot be claimed as a dependent on the tax return from someone else.