Recap of Taxes Today: Earned Income Tax Credit and Other Hot Topics
Drake Software and NATP met recently to discuss changes to the earned income credit (EIC) for 2021 tax returns, how the EIC works for taxpayers without children, preparer penalties and due diligence, and other hot topics such as the recently passed Infrastructure Investment and Jobs Act, and designation renewal.
This unscripted conversation was recorded for you to view, for free! To watch the full discussion, go to natptax.com/taxestoday.
Panelists include Drake Software‘s VP of strategic development, John Sapp, CPA, and tax analyst Bob Nolan, EA, CPA, along with NATP tax research specialist Sheri Fronsee, CPA, and NATP member and tax prep expert Rhonda Collins, CPA, MBA, EA. Also, Randy Adams, EA, joined the panel. Randy is a Drake Software user and an NATP instructor.
Video transcript:
Megan Sonicksen: Thank you for joining us again for Taxes Today. I’m Megan Sonicksen with NATP and I have the pleasure of moderating this conversation. I’m once again joined by our friends at Drake Software, John Sapp, CPA, Chief Revenue Officer and Federal Tax Analyst, Bob Nolan. Bob is a CPA and EA who is by all accounts a tax offer guru. Also, today we have Randy Adams, EA who’s a Drake Software user and an NATP instructor. And from NATP, we have Rhonda Collins and Sheri Fronsee. Rhonda is our Director of Tax Content and Government Relations, and Sheri is a CPA who’s been a part of the NATP research department for nearly 10 years. Today’s topic of discussion is the earned income tax credit, so let’s get started.
Randy, can you please give us a quick need to know regarding EIC for filing a 2021 tax return?
Randy Adams: Yeah, thanks Megan. We’ve seen some key changes to the age requirements for 2021, so they’ve lowered the minimum age requirement from 25 years old for those individuals without any children on the tax return and eliminated the maximum age requirement of 65 years old, so those are some key changes there. We still have to do the calculation on the tax return, which is looking at four key items.
We look at earned income, which would be salaries, wages, self employment, tips, those types of items. The second thing we look at would be their adjusted gross income. Third, we look at their filing status of the tax payers on the tax return. And lastly, we look at the number of qualifying children that they have on the tax return. So this could be anywhere from zero children all the way up to a maximum of three kids on the tax return.
And then a couple other changes. If someone doesn’t have a lot of earned income in 2021, the IRS is allowing us to go back to 2019 and use the 2019 earned income if that will give the taxpayer a better advantage in using the credit than the 2021 earned income. And finally, it’s a refundable credit, which means that if the taxpayers don’t have tax liability or a lot of tax liability, this will add to their refund base so it’ll help them out in that sense.
Megan Sonicksen: And Sheri, can you discuss how EIC works for taxpayers that don’t have children?
Sheri Fronsee: Well, as Randy mentioned, that was one of the key things that changed this year. For those taxpayers without children, there used to be an age floor and an age ceiling. The floor was 25 years and the age ceiling was 65 years. Those have been eliminated. For the most part now it’s children age 19 and above.
There’s some qualifiers that I’ll talk about in a moment, but the age 65 ceiling, that was eliminated completely. Now with regards to that floor level dropping from 25 to 19, it is however, dropped down to age 18 for your qualifying former youth children or qualified homeless youth. And the definition of those as the foster youth is defined as an individual who on or after they reached the age of 14 was foster care. And then for the homeless, this is defined as an unaccompanied youth who is homeless as like a homeless child or youth, or is unaccompanied at risk of being homeless or self supporting.
And again, like I said, the maximum age limit of 65, that was eliminated, and this helps the retirees who go back to work for whatever reason, whether they need to or want to. Now maybe some of them can catch some EIC. Or what about the grandparents in multi-generation homes, for example, and the grandparents are claiming the children. They now may be eligible for EIC if they’re above the 65 age mark.
Also, any students who are age 24, they’re eligible for EIC if they were a student for at least five calendar months during the year. This pretty much sweeps your graduates in from January to May.
Megan Sonicksen: That’s good information. And you kind of talked about the term qualifying, and it sounds like that’s the key to helping clients claim the credit. So Rhonda, what does a tax professional need to know about the eligibility for the credit?
Rhonda Collins: Okay, Megan, to be eligible for the earned income credit, the individual must have earned income and also must meet the AGI requirements as seen on the slides.