What is the Earned Income Tax Credit?
It is tax time in the United States, and many Americans are trying to make sense of the new tax code and hoping they qualify for a return instead of having to pay.
One thing that could ensure a return is qualifying for the Earned Income Tax Credit (EIC or EITC), which is a benefit for those who have low to moderate income. To qualify for the Earned Income Tax Credit, you must meet a number of criteria, including:
- Have earned income and are filing a tax return (without Form 2555 or 2555-EZ).
- Been a U.S. citizen or resident alien for the full tax year.
- Have a valid Social Security number for yourself, your spouse (if filing jointly) and any children you are claiming on your return. If you are not claiming any children, you (or your jointly filing spouse) must have been born between January 1, 1955 and December 31, 1994. You do not qualify for EIC if someone else can claim you as a dependent.
- Not have investment income over $3,600.
To earn the Earned Income Tax Credit, your earned income and adjusted gross income must be lower than:
- If you are not claiming a child, $15,570 (or $21,370, if filing jointly).
- One child, $41,094 (or $46,884, if filing jointly).
- Two children, $46,703 (or $52,493, if filing jointly).
- Three or more children, $50,162 (or $55,952, if filing jointly).
If you qualify for the EIC, you will not get your return until mid-February.
What should I do with my tax return?
If you are receiving a tax refund this year, try not to spend the money on items you do not need. Instead, take this as an opportunity to improve your financial situation.
First, pay off any debt the return will cover. As you may be aware, credit cards charge interest (sometimes as high as 29.99%). The faster you can pay off (or at least decrease) your debt, the more money you will save in the long-term.
If you are already debt-free, put some money aside for a rainy day. Most experts suggest having six months worth of expenses in savings. Thus, if your expenses are $3,000 each month, you should aim to have $18,000 in savings. These funds will help you cover unforeseen employment lapses or emergency expenses.
Finally, you may want to consider using your refund to get a secured credit card. If you do not have a credit card, you may not realize they make transactions safer and more convenient.
A secured credit card can also help you build or rebuild your credit. Even though you deposit the funds that create your credit line, a secured credit works much like an unsecured card. You use it to make purchases in stores and online, then you must pay your bill on time each month. After six months to a year of responsible use, you may see your credit score start to increase.
Top Secured Cards for 2020
Here are three of the top secured cards you should consider applying for with your earned income tax credit: