Background on the EIC
The Earned Income Credit (EIC) is a federal tax credit that helps reduce an individual’s income tax liability. It is generally available to low-to-moderate-income taxpayers with children. However, individuals without children may be eligible for the EIC if their income is low enough.
When taxpayers calculate their EIC for the current tax year, they generally use their current year earned income. Current year earned income excludes investment income (interest, dividends, capital gains, etc.).
For the 2021 tax year, taxpayers have greater flexibility in calculating their earned income and EIC amount. For the 2021 Form 1040, taxpayers can use either their 2021 or their 2019 earned income to calculate the tax credit.
The IRS published this update in the FAQs on their website. Taxpayers can access the FAQ here.
Why is the 2019 Election Beneficial to Some Taxpayers?
To qualify for the EIC, the taxpayer must have some earned income. By allowing taxpayers to use their 2019 or 2021 earned income, they can test both calculations to see what yields the larger. In most cases, this helps taxpayers who were employed in 2019 but lost their jobs in 2021 and had little to no income.
Example 2019 Calculation
John Smith, a single-filing taxpayer with no children, was employed in 2019 and had earned an income of $15,000. John’s EIC amount for 2019 is $42, according to the EIC tables in Publication 596.
In 2020, John Smith lost his job and remained unemployed for 2021. John is preparing his 2021 Form 1040 tax return and wants to calculate his earned income tax credit.
Because John’s earned income in 2021 was zero, he cannot qualify for the EIC using his 2021 earnings. However, John can use his 2019 earned income for the 2021 calculation.
John’s EIC amount for the 2021 tax year, using his 2019 earned income, is now $980 instead of $0. John reports the $980 credit on his tax return.