Want to Save Up to $6,557 On Your Taxes? Do This

You can save money on taxes by stashing funds in a tax-deferred retirement account, claiming legitimate business deductions, or claiming deductions for charitable donations or medical expenses, among other things. But if you don’t qualify for any of those, that doesn’t mean you’re stuck with a huge tax bill.

The Earned Income Tax Credit (EITC) is worth up to $6,557 for the 2019 tax year and the qualification requirements aren’t that stringent. Low- and moderate-income households with at least one working adult can shave hundreds or thousands of dollars off their tax bill by claiming it. Let’s take a closer look.

What is the Earned Income Tax Credit (EITC)?

The EITC is a refundable tax credit aimed at giving low- to average-income households a break on their taxes.

Tax credits offer a dollar-for-dollar reduction of your tax bill, unlike deductions, which only reduce your taxable income.

If you owed the government $3,000 for the year in taxes and you qualified for a $1,000 tax credit, you’d only owe the government $2,000.

Refundable tax credits are the best kind because they can reduce your tax liability below zero. Let’s say you owed the government $1,000 for the year in taxes and you qualified for a $2,000 refundable tax credit.

The first $1,000 would come off your tax bill, meaning you’d owe the government nothing. The second $1,000 would come back to you in the form of a refund.

Who qualifies for the EITC?

The EITC is open to single adults and families who meet the following criteria:

  1. You, your spouse, if applicable, and any qualifying children you list on your tax return must have valid Social Security numbers.
  2. You cannot file taxes as Married, filing separately.
  3. You cannot have earned more than $3,600 in investment income in 2019.
  4. You or your spouse, if filing jointly, must have earned at least $1 from a job during 2019. Self-employment income counts.
  5. Your adjusted gross income (AGI) must be below the threshold for your tax filing status and number of qualifying children. See the table below.

Your AGI is your income minus some tax deductions, like half of self-employment taxes, alimony payments, or contributions to tax-deferred retirement accounts. In order to qualify for the EITC for your 2019 tax return, your AGI must be below the following thresholds based on your tax filing status and number of qualifying children.

Source: IRS

For the purpose of the EITC, a qualifying child is one who meets the following criteria:

  1. The child is your biological, step, adopted or foster child; a sibling, half-sibling, or step-sibling; or a descendant of any of these individuals.
  2. The child must be younger than you and your spouse, if applicable, at the end of the tax year.
  3. The child must be younger than 19 at the end of the tax year or younger than 24 if he or she is still a full-time student. If the child is permanently disabled, he or she can be any age.
  4. The child must have lived with you for more than half of the tax year.
  5. The child cannot file a joint tax return with his or her spouse, if applicable, unless neither the child nor his or her spouse are required to file taxes for the year and are only doing so to claim a tax refund.

If you don’t have a qualifying child, you must meet the following additional requirements to claim the EITC:

  1. You and your spouse, if applicable, must have your primary home in the United States and live there for more than half the year.
  2. You and your spouse, if applicable, cannot be claimed as a dependent or qualifying child on anyone else’s tax return.
  3. You and your spouse, if applicable, must be between the ages of 25 and 65 at the end of the tax year.

If you fulfill all of the necessary requirements, you can claim the EITC this year. How much you’ll get depends on how many qualifying children you have and what your income is.

How much is the EITC worth for the 2019 tax year?

The largest EITC you can get for the 2019 tax year is:

  • $529 with no qualifying children
  • $3,526 with one qualifying child
  • $5,828 with two qualifying children
  • $6,557 with three or more qualifying children

But you might not actually get this much. For every dollar your AGI increases, your EITC will keep growing until you reach a certain point, which depends on your tax filing status and number of qualifying children, at which you qualify for the maximum EITC listed above. But if your AGI is over a certain amount, which again depends on your tax filing status and number of qualifying children, your EITC will begin to decrease until you’re no longer eligible for the credit at all once you exceed the AGIs listed above.

You don’t need to understand how all of this is calculated in order to claim your credit. You can use the IRS’s EITC Assistant to estimate the amount of your credit, or if you’re using tax filing software, it should calculate your credit for you. You don’t need to do anything special to claim the credit. The software should ask you questions to determine your eligibility, and it’ll automatically claim it for you if you qualify.

The EITC is one of the most valuable tax credits there is, so you definitely want to take advantage of it if you can. You don’t need to understand how it all works in order to claim it, but it helps to do so because it can give you a better sense of what to expect for your tax bill or tax refund this year.

— Kailey Hagen

46-Year-Old CEO Bets $44.2 Billion on One Stock [sponsor]
Netflix is NOT the future of entertainment. It's only a small fraction. And one billionaire CEO is taking charge of what Netflix DOESN'T do and leading the way for the next generation of entertainment. His forward-thinking company, which many people haven't even heard of yet, doesn't only want to compete with Netflix... It wants to rule the world...

Source: The Motley Fool