Earned Income Credit: Tax law changes for tax year 2021 and beyond

Editor’s note: In late May 2022, the IRS issued updates to its questions and answers about the Earned Income Credit.

The American Rescue Plan Act of 2021 (ARPA) brought several changes to the Earned Income Credit (EIC) that expand eligibility to claim the credit and potentially increase the amount of credit that can be received.

Changes for taxpayers without qualifying children

The largest changes to the EIC apply to taxpayers without qualifying children. Note that the changes in this section apply only to the 2021 tax year.

• Eligible age range expanded: Younger and older taxpayers can now claim the EIC in 2021 if they otherwise meet the earned income requirements. Previously, only individuals between the ages of 25 and 65 were eligible for the credit, but the minimum and maximum ages have both changed for 2021. In general, the minimum age to be eligible is now lowered to 19. This minimum is further lowered to 18 for qualified homeless or former foster youth. Note, however, that eligible students (those who are enrolled in a degree program with at least a half-time course load for five calendar months of the tax year) must be at least 24 to be eligible for the EIC. Finally, the upper age limit has been completely removed, which means that taxpayers over 65 can now claim the EIC during the 2021 tax year.
• Percentage and threshold changes: The credit percentage at which the EIC phases in/out has been increased to 15.3% in 2021 (previously 7.65%), and the credit maximum is reached at an earned income amount of $9,820 (previously $7,100). The AGI/earned income threshold at which the EIC begins to phase out has been raised to $11,610 (previously $8,880) for single taxpayers and $16,610 (previously $14,820) for joint filers. As a result of these changes, the maximum EIC that could be claimed by a childless taxpayer increases from $543 to $1,502.

Changes for taxpayers with children

A few changes apply specifically to taxpayers with children, and are in effect in 2021 and beyond.

• Identification requirements for children: Previously, taxpayers with qualifying children who were unable to provide a name, age, and valid Social Security Number for their children were not eligible to claim the EIC. However, with the ARPA changes, these taxpayers can now claim the childless EIC if they meet the income requirements.
• Married filing separately taxpayers: Taxpayers with a status of “married filing separately” who have qualifying children can now claim the EIC using this filing status if: a) they resided with the qualifying child for more than half the tax year, and b) they either lived separately from their spouse during the last six months of the year, or have a written separation decree/agreement and lived separately from the spouse as of the end of the tax year. Thus, a taxpayer filing separately who separated from their spouse near the end of the tax year (with a written decree) will now be eligible for the EIC. Previously, a separated spouse who desired to claim the EIC had to qualify to file as head of household, which, among other requirements, included only the more stringent test of living separately from the spouse during the last six months of the tax year.

Changes for all taxpayers

Two more changes apply to taxpayers with and without qualifying children.

• Investment income: The cap on investment income has been raised for purposes of qualifying for the EIC. Beginning in 2021, an individual can now claim the EIC with up to $10,000 of investment income (which will be indexed for inflation in future years). Before this change, individuals were prevented from claiming the EIC if they had investment income over $3,650.
• Earned income lookback rule: For tax year 2021, the taxpayer may elect to look back two years and use 2019 earned income instead of 2021 earned income for purposes of calculating the credit. This is optional and can be used if the 2019 earnings will increase the amount of credit that can be claimed.

Conclusion

Overall, practitioners can expect an increase in qualified EIC claims for the 2021 tax year, especially for childless individuals. This may be due to the relaxed age requirements, the relaxed ID requirements that allow certain families with children to claim the childless EIC, or the increase in allowable investment income. In addition, some clients who did not previously qualify for the EIC may now qualify if they had a decrease in usual income during COVID-19. Therefore, it is especially important to check if clients qualify for the EIC, even if they didn’t in previous years. Finally, remember that for taxpayers experiencing income fluctuations, it is especially important to compare pre-pandemic (2019) income with current income to determine whether they can benefit from the lookback rule in order to receive the largest refund.

Editor’s note: This article was originally published Dec. 10, 2021, and updated with new content on May 26, 2022.