• Expansion of EITC for Taxpayers with No Qualifying Children

     Code Sec. 32 provides an earned income tax credit (EITC) for low- and moderate-income taxpayers. An eligible individual is allowed an EITC against the individual’s tax for the tax year an amount equal to the credit percentage of so much of the individual’s earned income for the tax year as doesn’t exceed the earned income amount. ( Code Sec. 32(a)(1) )

    However, the amount of the EITC allowable to a taxpayer for any tax year may not exceed the excess (if any) of: (A) the credit percentage of the earned income amount, over (B) the phaseout percentage of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the tax year as exceeds the phaseout amount. ( Code Sec. 32(a)(2) )

    The credit percentage and phaseout percentage are 7.65% for a taxpayer with no qualifying children. ( Code Sec. 32(b)(1) )

    The earned income amount is $4,220 for a taxpayer with no qualifying children. ( Code Sec. 32(b)(2)(A) )

    The phaseout amount for a taxpayer (other than a taxpayer filing jointly) with no qualifying children is $5,280. ( Code Sec. 32(b)(2)(A) )

    The phaseout amount for a taxpayer filing jointly is increased by $5,000. ( Code Sec. 32(b)(2)(B) .

    All the amounts discussed above are adjusted for inflation. ( Code Sec. 32(j) )

    The earned income amount and phaseout amounts, adjusted for inflation for 2021, are $7,100 and $8,880 (for a taxpayer not filing jointly), respectively. The $5,000 amount for 2021 is $5,940.

    One of the requirements for being an eligible individual is that the individual has attained age 25 but not attained age 65 before the close of the tax year. ( Code Sec. 32(c)(1)(A)(ii)(II) )

    New law. ARPA provides that, in the case of any tax year beginning after December 31, 2020, and before January 1, 2022, Code Sec. 32(c)(1)(A)(ii)(II) is amended so that one of the requirements for being an eligible individual is that the individual has attained “the applicable minimum age” before the close of the tax year (rather than “attained age 25”) ( Code Sec. 32(n)(1)(A) , as amended by ARPA Sec. 9621(a))

    The reference to age 65 is removed. ( Code Sec. 32(n)(2) , as amended by ARPA Sec. 9621(a))

    The term “applicable minimum age” means, except as provided below, age 19. ( Code Sec. 32(n)(1)(B)(i) , as amended by ARPA Sec. 9621(a))

    In the case of a “specified student” (other than a “qualified former foster youth” or a “qualified homeless youth”), the applicable minimum age is 24. ( Code Sec. 32(n)(1)(B)(ii) , as amended by ARPA Sec. 9621(a))

    In the case of a qualified former foster youth or a qualified homeless youth, the applicable minimum age is 18. ( Code Sec. 32(n)(1)(B)(iii) , as amended by ARPA Sec. 9621(a))

    A “specified student” means, with respect to any tax year, an individual who is an eligible student (as defined  Code Sec. 25A(b)(3) ) during at least five calendar months during the tax year. ( Code Sec. 32(n)(1)(C) , as amended by ARPA Sec. 9621(a))

    The term “qualified former foster youth” means an individual who:

     

    1. on or after the date that such individual attained age 14, was in foster care provided under the supervision or administration of an entity administering (or eligible to administer) a plan under part B or part E of title IV of the Social Security Act (without regard to whether Federal assistance was provided with respect to such child under such part E), and
    2. provides (in such manner as the IRS may provide) consent for entities which administer a plan under part B or part E of title IV of the Social Security Act to disclose to the IRS information related to the status of such individual as a qualified former foster youth. ( Code Sec. 32(n)(1)(D) , as amended by ARPA Sec. 9621(a))

    The term “qualified homeless youth” means, with respect to any tax year, an individual who certifies, in a manner as provided by the IRS, that such individual is either an unaccompanied youth who is a homeless child or youth, or is unaccompanied, at risk of homelessness, and self-supporting. ( Code Sec. 32(n)(1)(E) , as amended by ARPA Sec. 9621(a))

    Increase in credit percentage and phaseout amounts. The 7.65% credit percentage and phaseout percentage is increased to 15.3%. ( Code Sec. 32(n)(3) , as amended by ARPA Sec. 9621(a))

    The $4,220 earned income amount is increased to $9,820. ( Code Sec. 32(n)(4)(A)(i) , as amended by ARPA Sec. 9621(a))

    The $5,280 phaseout amount is increased to $11,610. ( Code Sec. 32(n)(4)(A)(ii) , as amended by ARPA Sec. 9621(a))

    These amounts are not adjusted for inflation. ( Code Sec. 32(n)(4)(B) , as amended by ARPA Sec. 9621(a))

    Observation.  ARPA does not mention any change to the $5,000 amount for married taxpayers. Presumably, then, the phaseout amount for married taxpayers in 2021 is $16,610 (using the unadjusted $5,000 amount).

     

    Information return matching.  As soon as practicable, the Secretary of the Treasury must develop and implement procedures to use information returns under  Code Sec. 6050S (relating to returns relating to higher education tuition and related expenses) to check the status of individuals as specified students. ( Code Sec. 32(n)(1)(B) , as amended by ARPA Sec. 9621(a))

    Effective date.  The amendments made by ARPA Sec. 9621 apply to tax years beginning after December 31, 2020, and before January 1, 2022. (ARPA Sec. 9621(b);  Code Sec. 32(n) , as amended by ARPA Sec. 9621(a))

    EITC Available Even if Identification Requirements Not Met

     Code Sec. 32 provides an earned income tax credit (EITC) to an eligible individual based on the number of qualifying children the eligible individual has. ( Code Sec. 32(c)(3) ) In some cases, an eligible individual with no qualifying children can receive an EITC. ( Code Sec. 32(c)(1)(A)(ii) )

    A qualifying child is not taken into account for determining the amount of the EITC unless the eligible individual provides the qualifying child’s name, age, and taxpayer identification number (TIN). ( Code Sec. 32(c)(3)(D)(i) )

    In addition, no EITC is allowed to an eligible individual who has one or more qualifying children if, because of the Code Sec. 32(c)(3)(D)(i) qualifying child identification requirement, no qualifying child of the individual can be taken into account in determining the eligible individual’s credit. ( Code Sec. 32(c)(1)(F) )

    Observation.   Code Sec. 32(c)(1)(F) effectively says that an individual, who would have qualifying children but for the identification requirements, cannot claim an EITC as an eligible individual with no qualifying children.

     

    New law. ARPA removes Code Sec. 32(c)(1)(F) . (ARPA Sec. 9622(a))

    Observation. As a result of this change, if an otherwise eligible individual has qualifying children, but cannot provide proper identification, then the individual will be eligible for the EITC for individuals that have no qualifying children.

     

    Effective date. This provision applies to tax years beginning after December 31, 2020. (ARPA Sec. 9622(b))

    EIC Rules, Under Which Certain Separated Married People Need Not File Jointly, Are Liberalized

    Under pre-ARPA law, an individual who was married (within the meaning of Code Sec. 7703 ) had to file a joint return for the tax year to claim the earned income credit (EIC). ( Code Sec. 32(d) )

    However, the (pre-ARPA) regs provided that the joint-return filing requirement didn’t apply to an individual who was not considered married under  Code Sec. 7703(b) and its regs, i.e., it didn’t apply to an individual:

    (1) who was “married” under Code Sec. 7703(a) ;

    (2) who filed separately;

    (3) who maintained as his or her home a household that was, for more than half of the tax year, the principal place of abode of a child for whom the individual would be entitled to a dependency deduction for the tax year;

    (4) who furnished over one-half of the cost of maintaining that household during the tax year; and

    (5) whose spouse wasn’t a member of that household during the last six months of the tax year. ( Reg §1.32-2(b)(2) ; Code Sec. 7703(b) )

    New law. ARPA provides modifies and liberalizes rules under which certain separated married people need not file jointly; these modified rules are now found in  Code Sec. 32(d) .

    (1) is “married” (under Code Sec. 7703(a) );

    (2) does not file a joint return for the tax year;

    (3) lives with his or her qualifying child (as defined in Code Sec. 32(c)(3) ) for more than half of the tax year; and

    (4) either (a) during the last six months of the tax year, does not have the same principal place of abode as his or her spouse, or (b) has a decree, instrument, or agreement (other than a decree of divorce) described in Code Sec. 121(d)(3)(C) with regard to his or her spouse and is not a member of the same household with his or her spouse by the end of the tax year. ( Code Sec. 32(d) , as amended by ARPA Sec. 9623(a)(2))

    Observation. Thus, under ARPA, a separated individual who meets requirements (1) through (3), above, can avoid the joint-filing requirement by either not living with the ex-spouse during the last six months of the year, or by having a decree, instrument or agreement described in  Code Sec. 121(d)(3)(C) , and not living with the ex-spouse “by the end of the tax year.”

     

    Effective date. This provision applies to the tax years beginning after December 31, 2020. (ARPA Sec. 9623(c))

    Taxpayers May Have Up to $10,000 of “Disqualified” (Investment) Income and Still Claim EIC

    Under pre-ARPA law, a taxpayer who had “disqualified income” (i.e., certain types of investment income) over $2,200 (as adjusted for inflation) for the tax year could not claim the earned income credit (EIC). ( Code Sec. 32(i)(1) )

    For 2021, the inflation-adjusted amount of disqualified income was $3,650.

    Inflation adjustments to the disqualified-income dollar amount were made by multiplying the dollar amount by the cost of living adjustment determined under  Code Sec. 1(f)(3) (the inflation adjustment rules for the income tax brackets) for the calendar year in which the tax year begins, determined by substituting “calendar year 1995” for “calendar year 2016” in Code Sec. 1(f)(3)(A)(ii) . ( Code Sec. 32(j)(1) )

    New law.  Under ARPA, the threshold amount for disqualified income is raised to $10,000. ( Code Sec. 32(i)(1) , as amended by ARPA Sec. 9624(a))

    The $10,000 amount will be adjusted for inflation for tax years beginning after 2021. ( Code Sec. 32(j)(1) , as amended by ARPA Sec. 9624(b)(1))

    Inflation adjustments to the $10,000 amount will be made by multiplying the dollar amount by the cost of living adjustment determined under  Code Sec. 1(f)(3) for the calendar year in which the tax year begins, determined by substituting “calendar year 2020” for “calendar year 2016” in Code Sec. 1(f)(3)(A)(ii) . ( Code Sec. 32(j)(1)(B)(iii) , as added by ARPA Sec. 9624(b)(4))

    Effective date. This provision applies to the tax years beginning after December 31, 2020. (ARPA Sec. 9624(c))

    Application of the Earned Income Tax Credit to U.S. Possessions

    The earned income tax credit (EITC) provides a refundable tax credit for eligible low-income workers, computed by applying a credit percentage to a base amount, (phaseout amounts limit the credit). ( Code Sec. 32 ) Pre-ARPA, the EITC was not available to individuals in the U.S. Commonwealths or Territories listed below.

    New law. Beginning in 2021, and each calendar year thereafter, IRS shall make payments to cover certain costs of the EITC as follows ( Code Sec. 7530 , as added by ARP Act Sec. 9625):

    (a) The Commonwealth of Puerto Rico must have an equivalent EITC beginning in 2019 and reform the existing EITC to either:

     

    1. increase the percentage allowed as a credit for each group of individuals or,
    2. substantially increase workforce participation. IRS will pay a specified matching amount for the year, plus, through 2025, the annual cost of educational efforts for individuals and tax preparers up to $1 million.

    The specified matching amount is the lesser of:

     

    1. the excess cost to Puerto Rico of the EIC over the base amount for the calendar year, or
    2. three times the base amount for the year.

    The base amount is the greater of the cost to Puerto Rico of the EIC beginning with calendar year 2019, rounded to the nearest multiple of $1 million, or $200 million adjusted for inflation.

    The cost of the EIC will be determined based on the laws of Puerto Rico and will include reductions in revenue received by reason of such credits and refunds, but not administrative costs associated with the credit.

    (b) IRS will pay to the U.S. Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands, possessions with mirror tax code systems, amounts equal to the cost of the EIC to these U.S. possessions, plus the annual cost of educational efforts for individuals and tax preparers up to a limit of $50 thousand through 2025.

    (c) The American Samoa territory must enact and maintain an EIC beginning in 2021 that is designed to substantially increase workforce participation. IRS will pay its cost of the EIC up to $16 million per year, adjusted for future inflation, plus the cost of EIC educational efforts for individuals and tax preparers up to $50 thousand per year through 2025.

    IRS shall make payments to these U.S. territories and possessions after receiving information, annually, concerning the cost of EIC and the cost of educational efforts in each location.

    Effective date. Date of enactment of ARPA, March 11, 2021.

    Individuals May Base Their 2021 EIC on 2019 Earned Income

    The earned income credit (EIC) equals a percentage of the taxpayer’s earned income. ( Code Sec. 32(a) ) For this purpose, earned income means wages, salaries, tips, and other employee compensation, if includible in gross income for the tax year.

    Earned income also includes self-employment income, computed without the deduction for one-half of self-employment tax. ( Code Sec. 32(c)(2) )

    New law. Under ARPA, in determining the EIC for 2021, taxpayers may elect to substitute their earned income for 2019 if that 2019 amount is greater than the taxpayer’s earned income for 2021. (ARPA Sec. 9626(a))

    For joint returns, the taxpayer’s earned income for 2019 is the sum of each spouse’s earned income for 2019. (ARPA Sec. 9626(b)(2))

    An incorrect use on a return of earned income under ARPA Sec. 9626(a) (above) is a mathematical or clerical error for which IRS may make a summary assessment under  Code Sec. 6213(b)(1) . (ARPA Sec. 9626(c)(1))

    The substitution of 2019 earned income allowed under ARPA Sec. 9626(a) (above) has no other effect on the application of the Internal Revenue Code. (ARPA Sec. 9626(c)(2))

    Treasury will pay to each U.S. possession that has a mirror code tax system (i.e., under which the income tax liability of possession residents is determined by reference to the income tax laws of the U.S., as if that possession were the U.S.), amounts equal to the loss (if any) to that possession by reason of the application of ARPA Sec. 9626, discussed above, with respect to  Code Sec. 32 .

    Those amounts will be determined by Treasury based on information provided by the possession government. (ARPA Sec. 9626(d)(1); ARPA Sec. 9626(d)(3))

    Treasury will pay to each U.S. possession that doesn’t have a mirror code tax system (see above) amounts estimated by Treasury as equal to the aggregate benefits (if any) that would have been provided to possession residents by reason of ARPA Sec. 9626 with respect to  Code Sec. 32 if a mirror code tax system had been in effect in the possession.

    The rule just stated doesn’t apply unless the possession has a plan, approved by Treasury, under which the possession will promptly distribute the payments to its residents. (ARPA Sec. 9626(d)(2))

    For purposes of 31 U.S. Sec. 1324 (refund of internal revenue collections), payments under ARPA Sec. 9626 (discussed above) are treated the same as a refund due from a credit provision referred to in 31 U.S. Sec. 1324(b)(2), (governing refunds due from credit provisions of the Internal Revenue Code). (ARPA Sec. 9626(d)(4))

    Effective date. This provision applies to the taxpayer’s first tax year beginning in 2021. (ARPA Sec. 9626(a))

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