The woman had Social Security benefits, a tiny pension that amounted to less than $1,000 for all of 2021, and she earned around $2,500 working as seasonal help at a local store.
“She wanted to make sure her friends and family had a nice Christmas, so she picked up a side job,” said Matt Hetherwick, director of individual tax programs for the nonprofit Accounting Aid Society in Detroit.
Hetherwick met the retiree when he was helping out one day at an in-person tax help site at the Oakland County Treasurer’s Office on North Telegraph Road in Pontiac. The Accounting Aid Society in Detroit offers free tax preparation – both in-person and remote help – for individuals and families with incomes up to $58,000. (See AccountingAidSociety.org for more information.)
Typically, Hetherwick said, the retiree would not have qualified for extra money through the earned income tax credit.
But pandemic-related relief changed many rules for 2021 tax returns. For both young and older workers, it’s key to realize that the rules this tax season aren’t exactly the same as years past.
On 2021 tax returns, temporary new rules will enable some people who might not have qualified otherwise to obtain good money through the earned income tax credit.
The new rules added nearly $400 to the federal income tax refund for the woman at the Oakland County tax site. As a Michigan resident who qualifies for a federal earned income tax credit, she also can receive a 6% supplemental credit by filing a Michigan state income tax return.
The most one can earn with no qualifying children on 2021 federal income tax returns is $1,502. That’s nearly triple the old benefit of up from $538 on 2020 returns for those with no children.
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Age is less of an obstacle
What was the key change for the retiree who made money as a holiday worker? The dropping of an age limit.
On 2021 returns, there’s no longer an age cap or ceiling set at 64 or younger for workers to qualify for the earned income tax credit. It’s a one-time only deal but the AARP is pushing to extend the tax break for older workers beyond 2021 tax returns.
The earned income credit has been expanded so that the credit can apply on 2021 federal returns to workers who are 65 or older, even if they do not have dependent children, thanks to the American Rescue Plan passed last year.
It now also applies to childless workers from age 19 to 24 who are not half-time or full-time students and claimed as dependents on their parents tax return.
More than one in three young adults – or more than 5 million people – would benefit from this change in the earned income tax credit, seeing an average of benefit $820, according to the Institute on Taxation and Economic Policy, a progressive think tank, which is advocating for a permanent change in the age restrictions.
The extra benefit could reduce taxes owed or boost the refund, depending on an individual’s situation.
In Michigan, it is expected that 195,000 young adults could benefit overall – young workers without children in the home who range from 19 to 24 years old and are not full-time students.
If you are a student, you must be 24 years old or older to claim the earned income tax credit. The American Rescue Plan Act also reduced the age limit for the earned income tax credit for students working at least part-time from 25 to 24, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
This year, the earned income tax credit also applies to someone who is at least 18 if they are a qualified homeless youth or a qualified former foster youth.
In the past, you had to be at least 25 to qualify for the earned income tax credit and younger than 65 as of Dec. 31 of the tax year if you did not have a qualifying child. There is no minimum age for taxpayers who are claiming a qualifying child.
Young people who don’t have a good paying job may find the credit to be very helpful this tax season, even if they haven’t started a family yet.
H. Luke Shaefer, Hermann and Amalie Kohn Professor of Social Justice and Social Policy at the University of Michigan School of Social Work, said the earned income tax credit, which has been in place since 1975, encourages work.
“The great thing about the EITC is that it increases as your work increases,” said Shaefer, who is also director of U-M’s Poverty Solutions initiative.
The money can cover extra expenses associated with work, such as transportation and child care.
The changes in the age limits, he said, can help encourage more people age 19 to 24 be encouraged to be a part of the workforce. Broadening the credit to those 65 and older, he said, also helps those in the aging population continue to work in jobs that may not pay a great deal of money.
“It helps increase the benefits of work,” he said.
The credit ends up reducing one’s personal income tax liability so that low-income filers can keep more of the money they’re earning.
He said it would be beneficial going forward if those changes are made permanent.
Workers without dependent children, including younger workers, and workers with adult children, have not seen a meaningful increase in their earned income tax credit since 1993, according to a White House briefing.
All of these new rules — and the fact that they are temporary – can be quite confusing to many tax filers who have not even heard of this important relief.
It’s a first – but it’s also only limited to 2021 income.
Hetherwick said it’s been important this tax season to try to reach out to people who normally might not make enough money to file a tax return — including younger and older workers.
Many people who normally do not need to file a return could benefit from filing a 2021 return this year, thanks to extra relief for the earned income tax credit and the child tax credit.
Hetherwick said many parents who are non-filers do not realize that they need to file a 2021 return to claim the rest of the child tax credit that they’re owed. And some don’t realize that the earned income credit can apply to them if they don’t have children.
Many times, he said, trained volunteers who are preparing taxes for one person will suggest that the tax filer reach out to a friend or family member if they think they will benefit from expanded tax credits this tax season.
“We find at the end of the day, the grassroots style works better than anything,” Hetherwick said.
What do you need to know about the earned income tax credit?
To qualify for the earned income credit, you need to have earned some money in 2021.
“It has to be earned. It can’t be unemployment,” Hetherwick said.
For young workers, he said, the credit might work if they’re just starting out and entered the workforce. Maybe they’ve worked part of last year but got laid off later in the year due to cutbacks or the pandemic.
To qualify, a young worker could not be claimed as a dependent on a parent’s 2021 tax return.
Workers making a modest wage who don’t have children can even benefit. The maximum $1,502 credit for those with no children applies when your earned income is between $9,800 and $17,599 for joint filers, and between $9,800 and $11,649 for single filers and others.
Tax filers who do not have qualifying children must have earned income below $21,430 if single and below $27,380 for spouses filing a joint return to qualify for any earned income tax credit.
What’s the income limit for the earned income credit?
Someone who is 65 or older or someone in that new 19 to 24 age range would have to have a limited income from wages earned.
Under a temporary change, you can use your earned income for 2019 to calculate the earned income credit if your income in 2021 is less than your 2019 income. (You might qualify for more of a credit if you had a higher income in 2019 some cases.)
For the 2021 return, you can select the year that gives you the bigger refund. If you are married filing jointly, the total earned 2019 income refers to the sum of each spouse’s earned income in 2019.
More workers, retirees who work side jobs and working families who also have investment income can get the credit on the 2021 return.
Starting in 2021, you could have in investment income of up to $10,000. Before 2021, the limit was $3,650 and once you hit that limit you could no longer qualify for the earned income tax credit.
After 2021, the $10,000 limit is indexed for inflation and the limit for 2022 returns will be rising to $10,300.
When you have children, the income limits are higher for low to moderate workers to qualify for the earned income credit.
Another key change: Singles and couples who have Social Security numbers can claim the credit, the IRS notes, even if their children don’t have Social Security numbers. But these workers would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for any of the earned income tax credit.
The maximum adjusted gross income is $57,414 for a married couple filing a joint return with three qualifying children.
With three or more qualifying children, the maximum credit is $6,728 on 2021 returns.
The potential earned income tax credit depends on your income, filing status and the number of qualifying children claimed on your tax return.
And yes, the earned income credit is in addition to any money you can qualify for with the child tax credit.
The key to maximizing both of those credits, Hetherwick says, is to file a 2021 tax return. And the best bet is to do so electronically, he said, and through a no-cost tax prep service to get the most money back possible.
AARP Foundation Tax-Aide helps all tax filers with a focus on taxpayers who are over 50 and have low to moderate income. There are no eligibility requirements.
Through April 18, those in need of tax services can go to aarpfoundation.org/taxaide, email firstname.lastname@example.org, or call toll free 888-227-7669 to find a site and make an appointment.