Let’s face it – most taxpayers don’t want to have to file their taxes. It’s cumbersome and difficult, and depending on your financial situation, number of sources of income, and number of dependents, it can be enormously complicated.
But failing to file a tax return might not only lead to hefty penalties but will also rob you of the opportunity to claim a myriad of tax benefits and potential tax refunds, including the Earned Income Tax Credit (EITC). The EITC is available to low- to moderate-income American families, provided you have an individual taxpayer identification number and a Social Security number for yourself and each of your dependents.
The EITC is calculated for every taxpayer, but earning certain amounts eventually disqualifies you from any EITC refund, meaning past a certain point of income, you cannot receive an EITC even if you claim multiple eligible dependents on your tax return.
However, the EITC is not only available to those living below the poverty line – for example, married couples filing jointly in 2023 with two eligible children can earn a qualified and adjusted gross income (AGI) of up to $59,478 before losing out on EITC benefits. As an aside, the U.S. median household income in 2019 was $65,712.
While Americans across the country can qualify for the federal Earned Income Tax Credit, Californian citizens have their own state EITC, called the California Earned Income Tax Credit (Cal EITC). California is the only state to provide people with an additional Earned Income Tax Credit, partially to alleviate some of the tax burden for low- to moderate-income households living in one of the country’s richest states.
What is California Earned Income Tax Credit?
The general purpose of the California Earned Income Tax Credit is the same as the federal government’s EITC: provide an additional tax credit for low-income taxpayers with earned income and social security information.
However, unlike the federal EITC, which scales eligibility based on filing status and number of dependents, Cal EITC has a flat requirement of $30,000 of adjusted gross income on state income tax returns, or less.
The Cal EITC increases with the number of dependents, but the income limit remains the same whether you have zero eligible claimed dependents, or more than three.
California Earned Income Tax Credit vs. Federal Earned Income Tax Credit
Exact amounts change year after year – in 2022, for example, eligible households with no dependents could claim a maximum Cal EITC of $275, and a federal EITC of $560. Eligible households with three or more dependents could claim a maximum Cal EITC of $3,417, and a federal EITC of $6,935.
The federal EITC is determined by the IRS, although every taxpayer is individually required to test for eligibility before claiming an EITC on their tax return. Cal EITC eligibility is determined by the California Franchise Tax Board, the state tax authority.
As previously mentioned, the IRS and California’s FTB calculate eligibility for an EITC differently. The IRS has variable income levels at which eligibility caps off, depending on the filing status and number of dependents. California’s FTB has a single cap.
Will the IRS Audit You for an EITC?
The IRS and state tax authorities will not automatically audit a tax account for an EITC, but they will apply a greater level of scrutiny for tax returns that claim an EITC. This is because the IRS is required to ensure eligibility. As a result, taxpayers who claim an EITC or the Additional Child Tax Credit will receive their tax refunds no earlier than mid-February.
Are You Eligible for an EITC?
Eligibility is the biggest challenge of receiving an EITC – not because it’s difficult to ascertain whether your income is low, but whether it is low enough to qualify, as well as whether your dependents count as eligible under the requirements of the state and federal EITCs. Thankfully, both the IRS and California’s FTB offer online calculators to help make EITC eligibility a little more transparent.
Furthermore, if you qualify as a low-income taxpayer, the IRS can help you figure out your tax return without the need for a professional tax preparer’s services.
What About the Child Tax Credit?
The EITC is not to be confused with the federal Child Tax Credit. The EITC is available to all low-income taxpayers, as long as they have an income of any form, as well as a Social Security number and an ITIN.
The Child Tax Credit and California’s Young Child Tax Credit are only available to individuals who can claim eligible children as their dependents. The latter is a state tax credit, rather than a federal tax credit.
Is the Cal EITC Refundable?
Yes, California Earned Income Tax Credit is a refundable tax credit.
This means that, while it counts first and foremost as a tax credit (reducing the amount of taxes you owe), anything left after paying for whatever taxes you didn’t already pay through withholding or estimated monthly payments is sent back to you. In other words, refundable tax credits like the EITC can result in more money in your pocket. This is also why tax authorities like the IRS and the California FTB go through additional trouble to ensure eligibility.
What Are the Disadvantages of Claiming an EITC?
It’s money back in your pocket, right? Well, yes – but it comes at a cost. Both the federal government and California’s state legislators are quite serious about ensuring that the EITC and Cal EITC benefits are withheld solely for families and individuals who really, really qualify.
This means that the IRS and state tax authorities will generally take a much closer look at your tax return if you choose to apply for an EITC.
Furthermore, the EITC is one of the hardest benefits to qualify for, due to the fact that its eligibility requirements are difficult to calculate. You will need to accurately total your earned income and report your adjusted gross income correctly, while ensuring that you do not accidentally claim a child who no longer qualifies, enter the wrong filing status, or use the wrong Social Security information.
Even if you do get everything right, the IRS and California’s state tax authorities will likely take longer to process and verify your tax information and returns, meaning all of your other refunds and tax credits will also be delayed. In fact, the government requires the IRS to hold refunds for taxpayers who claim the EITC and/or Additional Child Tax Credit (ACTC) until mid-February at the earliest, and early March at the latest.
If you are having your taxes prepared professionally, your tax preparer is obligated to inform you of the EITC and check your eligibility for you. Failing to do so may cost them a fine. We recommend you make use of this, and get yourself a professional tax preparation service if you choose to claim eligibility.
Even simple tax errors can result in penalties and tax debt. A tax professional can help you make sure that you’ve successfully crossed your T’s and dotted your I’s before claiming your EITC, or your Cal EITC. If you think your income levels might allow you to qualify for a California Earned Income Tax Credit, and/or the federal Earned Income Tax Credit, get in touch with us at Rush Tax Resolution to verify your amended return, or determine eligibility for the next Tax Day.