8 Myths About the EITC at Tax Time

The Earned Income Tax Credit (EITC) is one of the major tax credits designed for low and moderate-income groups. About 25 million eligible workers and families received about $63 billion in EITC nationwide as of December 2019. The average amount of EITC received was about $2,476.

With the tax season on, this a good time to consider if you qualify for this valuable tax credit. This tax credit is for working people who earn less than $54,884. If you earn less than that, you can receive a credit of up to $6,431. There are certain other qualifying factors attached to EITC such as whether you are single or married, and if you have children or the number of children you have.

The IRS has been promoting this tax credit by reminding taxpayers to check if they qualify. With rumors about recession, this credit money can really help meet certain living expenses. If you qualify, you may file your tax return quickly to receive the EITC credit amount sooner.

You can file a return and claim this tax credit even if you do not owe taxes and do not file a return. Before you do so, reading these myths shared by Forbes about the EITC can help you steer clear of misconceptions about this tax credit.

Myth 1. The EITC is a welfare system for those that don’t work. Please don’t share memes that say that people who do not work get EITC-related tax refunds at the expense of those who do work. That’s simply not true. To qualify for a refundable tax credit like an EITC (the ones that payout even if you don’t pay in), you have to work. It’s literally in the name: Earned Income Tax Credit. Earned income typically includes wages, salary, tips, and net earnings from self-employment. It also includes union strike benefits and long-term disability benefits received prior to minimum retirement age and may also include nontaxable combat pay. Earned income does not include passive income, which means income that you aren’t actively generating on your own, like interest and dividends, pay that you receive while incarcerated, retirement income, Social Security, unemployment benefits, and alimony. It also doesn’t include child support (that’s tax neutral).

Myth 2. Only families with children qualify for the EITC. If you have earned income and a valid Social Security number, your filing status must be married filing jointly, head of household, qualifying widow(er), or single; you can’t claim the EITC if your filing status is married filing separated. You must also meet specific income criteria. Specifically, your tax year investment income must be $3,500 or less for the year; you must not file form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion; and you must have at least $1 in earned income (yes, that means that a self-employed person who claims a loss won’t qualify). You don’t have to have kids to qualify, but the amount of your tax credit is dependent on your income and the number of your qualifying children. A qualifying child for the EITC must meet all of the following criteria:

• The child must be under age 19–age 18 or younger–at the end of the tax year OR the child must be younger than you or your spouse (if you file jointly) and under age 24 and a full-time student OR the child was any age and permanently and totally disabled;
• The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew;
• The child must have lived with you for more than half of the tax year (some exceptions apply); and
• The child cannot file a joint return for the tax year unless the child and the child’s spouse did not have a separate filing requirement and filed the joint return only to claim a refund.

Only one person can claim the same child for the same tax year. As for you? You must not be the qualifying child of another person to claim the EITC.

Myth 3. You can qualify for the EITC if you are undocumented. No matter what you’ve read on Facebook, illegal aliens are not entitled to refunds because of some tax policy involving ITINs. That’s not true. If you have earned income, you, your spouse and any qualifying child on your tax return must each have a valid Social Security number issued before the due date of your tax return (including extensions) to qualify for the EITC. You must also be a U.S. citizen or resident alien for the entire year. Again, we’ve all seen the stories about folks who aren’t in the country legally snatching up EITC tax refunds, but barring fraud, that’s not possible.

Myth 4. EITC refunds are issued immediately. Taxpayers who claim the EITC or Additional Child Tax Credit (ACTC) may have to wait a little longer for their tax refunds that taxpayers who do not claim EITC or ACTC. The IRS must wait until mid-February to begin issuing refunds to taxpayers who claim the EITC or the ACTC. In addition to regular processing times for banks, factoring in weekends, and the President’s Day holiday, the earliest EITC and ACTC-related refunds are expected to be available on or about February 28, 2020; that’s assuming direct deposit and no other issues.

Myth 5. The EITC is automatically paid to you even if you don’t file. To qualify, you must meet specific requirements and file a federal income tax return for the tax year even if you do not owe any tax or are not required to file a tax return. This is a common misunderstanding and is one of the reasons why the IRS has over a billion dollars in unclaimed refunds from year to year ($1.4 billion in unclaimed refunds for 2015 alone).

Myth 6. A lot of folks are lying to get EITC. Yes, fraud and mistakes happen. However, according to the Treasury Department, 70% of EITC improper payments (the big ones that get all of the press) are tied to confusion about the rules. Residency and relationships, usually those that involve child custody, divorce, and other issues related to who can claim a child in non-traditional family arrangements. That’s why a 2017 study found that most improper EITC-related payments were the result of mistakes, not intentional actions.

Myth 7. You don’t qualify for the EITC. You may not, depending on your income and family size. But the IRS estimates that four of five eligible taxpayers claim and get the EITC. Last year, 25 million taxpayers received over $61 billion in EITC. The average EITC amount received was $2,504.

Myth 8. It’s expensive to file for the EITC.  The rules for the EITC can be tricky to navigate. Special rules apply to members of the military, ministers, members of the clergy, those receiving disability benefits, and those impacted by disasters. Some age restrictions may also apply.

If still in doubt whether you quality for EITC or not, you can use the IRS EITC Assistant to help figure out if you qualify. There is still time before the tax season ends!