must file a joint return with your spouse in order to claim an earned income credit. However, this requirement is waived if your spouse did not live in your household for the last 6 months of the year or have a decree, instrument, or written agreement of separation and did not live with a spouse by the end of the year. In this case, assuming you paid the household expenses in which a qualifying child lived for the full year, you qualify as single for purposes of the earned income credit (using “other taxpayers” limits on AGI).
TABLE 1.5 AGI Phaseout Range for the Earned Income Credit in 2021
| Number of Qualifying Children | Married Filing Jointly | Other Taxpayers |
|---|---|---|
| No qualifying child | $17,560–27,380 | $11,610–21,430 |
| 1 qualifying child | $25,470–48,108 | $19,520–42,158 |
| 2 qualifying children | $25,470–53,865 | $19,520–47,915 |
| 3 or more qualifying children | $25,470–57,414 | $19,520–51,464 |
Example
You are married and file a joint return. You and your spouse have 1 qualifying child. In 2021, if your AGI is less than $25,470, your earned income credit is not subject to any phaseout. If your AGI is $48,108 or higher, you cannot claim any earned income credit; it is completely phased out. If your AGI is between these amounts (within the phaseout range), you may claim a reduced credit.
CHILDLESS INDIVIDUALS
For 2021, the minimum age for claiming the earned income credit, which had been 25, is reduced to 19. The minimum age for a full‐time student is 24; it's 18 for a former foster child or homeless youth. The maximum age, usually 65, does not apply in 2021.
If you have a qualifying child who lacks a Social Security number, you may claim the earned income tax credit as if you were childless.
Planning Tips
The credit is based on a set percentage of earned income. However, you don't have to compute the credit. You merely look at an IRS Earned Income Credit Table, which accompanies the instructions for your return.
You can have the IRS figure your credit for you (you don't even have to look it up in the table). To do this, just complete your return up to the earned income credit line and put “EIC” on the dotted line next to it. If you have a qualifying child, complete and attach Schedule EIC to the return. Also attach Form 8862, Information to Claim Earned Income Credit after Disallowance, if you are required to do so as explained next.
If your child does not qualify as your dependent because of the tie‐breaker rule (discussed earlier in this chapter), you may claim the earned income credit with no qualifying child. For example, a grandmother has a home in which her daughter and the baby (granddaughter) live. Under the tie‐breaker rule, while the baby could be a qualifying child of the grandmother and mother, she is the daughter's qualifying child. The grandmother can claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met. Alternatively, if the daughter foregoes the dependency exemption, the grandmother can claim it and the earned income tax credit, assuming that her AGI exceeds the daughter's AGI. In this instance, the daughter could claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met.
Pitfalls
You lose eligibility for the credit if you have unearned income over $10,000 in 2021 from dividends, interest (both taxable and tax free), net rent or royalty income, net capital gains, or net passive income that is not self‐employment income.
You lose out on the opportunity to claim the credit in future years if you negligently or fraudulently claim it on your return. (If you use a paid preparer, he or she is required to perform to diligence before allowing you to claim the earned income credit.) You are banned for 2 years from claiming the earned income credit if your claim was reckless or in disregard of the tax rules. You lose out for 10 years if your claim was fraudulent. If you become ineligible because of negligence or fraud, the IRS issues a deficiency notice. You may counter the IRS's charge by filing Form 8862, Information to Claim Earned Income Credit after Disallowance, to show you are eligible.
If the IRS accepts your position and recertifies eligibility, you don't have to file this form again (unless you again become ineligible). For 2021 returns filed in 2022, the IRS is not permitted to issue tax refunds for the refundable earned income tax credit before February 15, 2022. As a result, refunds usually aren't received until the third or fourth week in February, even for returns filed in January 2022.
Where to Claim the Earned Income Credit
You can claim the earned income credit on line 27 of Form 1040 or 1040‐SR.
Dependent Care Expenses
Many taxpayers must pay for the care of a child in order to work. According to the World Population Review, the cost of child care in 2021 for an infant is $15,000 at a center. The tax law provides a limited tax credit for such costs, called the dependent care credit. The amount of the credit you may claim depends on your income. It may be as much as 50% of eligible expenses. Or, if your employer helps with child care costs, you may exclude the payments from your income.
Benefit
If you hire someone to care for your children or other dependents to enable you to work or incur other dependent care expenses, you may be eligible for a fully refundable tax credit of up to $8,000. More specifically, this credit is a percentage of eligible dependent care expenses (explained later). The credit percentage ranges up to 50%. However, no credit may be claimed if income is $440,000 or more (explained later).
If your employer pays for your dependent care expenses, you may be able to exclude this benefit from income up to $10,500 in 2021.
The maximum amount of expenses taken into account for the credit in 2021 is $8,000 for one qualifying dependent and $16,000 for 2 or more qualifying dependents. This limit doesn't need to be divided equally among them.
Example
A single parent has two children. She spends $12,000 for daycare for one and $6,000 for after‐school daycare for the other. Because her total expenses do not exceed the limit of $18,000, she can take them all into account in figuring the dependent care credit for 2021.
In 2021, the credit is fully refundable.
Conditions for the Tax Credit
There are a number of conditions for claiming the dependent care credit; you must satisfy all 8 of them to claim the credit:
