Did you know that of people who filed their 2018 taxes electronically, over 43% of them prepared their taxes without the aid of a professional? Are you considering filing your own taxes? Or maybe you already do file your own taxes. Do you understand what earned income is and if it is before or after taxes?
If you want to be sure if you’re filing your taxes correctly, take a look at what you need to know about it today.
What Is Earned Income?
According to the IRS, earned income includes all the taxable income and wages you get from working for yourself, someone else, or from a business you own.
Earned income encompasses a range of income sources to include the following:
- Wages, salary, or tips where federal income taxes are withheld on Form W-2, box 1
- Income from a job where your employer did not withhold tax
- Money made from self-employment
- Benefits from a union strike
- Certain disability benefits you got before you were the minimum retirement age
- Nontaxable Combat Pay (Form W-2, box 12 with code Q)
Now that we know what earned income includes, what is not included in earned income.
- Pay received as an inmate
- Interest and dividends
- Pensions or annuities
- Social Security
- Unemployment benefits
- Child support
So, how does earned income differ from gross income?
Gross income is defined as all income an individual receives in the form of money, goods, property, and services that isn’t tax-exempt.
Basically, gross income includes all earned income plus income from investments in the form of interest and dividends, income from retirement account withdrawals, Social Security benefits, and other sources.
With this information in mind, how do you know if you qualify for the earned income tax credit?
Earned Income Tax Credit
You may qualify for the Earned Income Tax Credit (EITC) if you have a relatively low earned income. This also depends on if you are filing your taxes jointly or as a single and the number of dependents you are claiming.
You also have to make sure you know your Adjusted Gross Income (AGI). Adjusted gross income is what the IRS uses to determine what your tax liability will be for the filing year.
AGI is calculated by subtracting qualified deductions from your gross income.
For the earned income credit for the tax year 2021, the IRS has stipulated the qualifications for claiming the EITC.
For example, if you have 2 dependents claimed and you are filing married, and jointly, your maximum AGI can be $53,865.
If you are unsure about any of your financials or if you are unsure if you qualify for the earned income credit, it is always recommended to seek help from a professional.
Websites like payactiv are there to help working Americans receive the money they have earned.
Let’s File Those Taxes!
Now that you understand what earned income is and if you qualify for the earned income tax credit, it’s time to file those taxes!
Remember to always ask questions from a reliable professional or even the IRS if you encounter difficulties.