Special Rules Apply to 2020 EITC and Child Credit
Article Highlights:
- Employment (Earned) Income
- Earned Income Tax Credit (EITC)
- Child Tax Credit (CTC)
- 2019 or 2020 Earned Income
- Credit Qualifications
Not wanting those who normally rely on those credits to make ends meet to suffer further economically, Congress came up with a special way to calculate the two credits for 2020. So, 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 2020’s 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 | $7030 | $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 number of qualifying children. The 2020 phase-out ranges are shown in the table below.
| Qualifying Childeren | Filing Status | Phaseout Range |
| None | Married Filing Jointly | $14,680–21,750 |
| None | Others | $8,790–15,820 |
| 1 | Married Filing Jointly | $25,220–47,646 |
| 1 | Others | $18,030–41,094 |
| 2 | Married Filing Jointly | $25,220–53,330 |
| 2 | Others | $19,330–47,440 |
| 3 | Married Filing Jointly | $25,220–56,884 |
| 3 | 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 issuance of the valid SSN as explained above. Please call for assistance.
Child & Dependent Tax Credit – To aid to 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.
Want our best tax and accounting tips and insights delivered to your inbox?
Sign up for our newsletter.
Privileged And Confidential
This communication and any accompanying documents are confidential and privileged. They are intended for the sole use of the addressee. If you receive this transmission in error, you are advised that any disclosure, copying, distribution, or the taking of any action in reliance upon this communication is strictly prohibited. Moreover, any such disclosure shall not compromise or waive the attorney-client, accountant-client, or other privileges as to this communication or otherwise. If you have received this communication in error, please contact me at the above email address. Thank you.
Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Tobi Li Marshall CPA, APC would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.