Earned Income Credit changes in stimulus bill benefiting retirees

This is based on the House bill as passed originally but I do not believe the Senate struck these provisions.

SEC. 9621 – STRENGTHENING THE EARNED INCOME TAX CREDIT FOR INDIVIDUALS WITH NO
QUALIFYING CHILDREN.
Expands the eligibility and the amount of the earned income tax credit for taxpayers with no qualifying
children (the “childless EITC”) for 2021. In particular, the minimum age to claim the childless EITC is
reduced from 25 to 19 (except for certain full-time students) and the upper age limit for the childless
EITC is eliminated. This section also increases childless EITC amount by increasing the credit percentage
and phaseout percentage from 7.65 to 15.3 percent, increasing the income at which the maximum
credit amount is reached to $9,820, and increasing the income at which phaseout begins to $11,610 for
non-joint filers. Under these parameters, the maximum credit amount in 2021 increases from $543 to
$1,502. The provision contains special rules regarding the application of the credit for former foster
youth and homeless youth.

SEC. 9624 – MODIFICATION OF DISQUALIFIED INVESTMENT INCOME TEST.
Increases the limitation on disqualified investment income for purposes of claiming the EITC from
$3,650 (2020) to $10,000. The $10,000 amount is indexed for inflation.

The $10,000 limit will help many early retirees who normally might have too much investment income to qualify under the EITC. The limit was so low in the 1990’s, and bank and CD interest rates so high, that when I was in high school my family was zeroed out of EITC due to high investment income, even though their income was under the limit. Now, assuming you don’t have a lot of capital gains (and recognizing the current rule that a net capital loss counts as zero towards investment income, not up to $3,000 loss), you can just take “normal” dividends and interest and still qualify for EITC.

The same goes for not including an age limit on EITC for seniors, up from the previous 65. This makes delaying taking social security until 70 a lot easier. Work up to $11,610 and claim the EITC to rebate both the employer and employee side of social security (or all of SE tax).

I think many people would still rather do Roth conversions or unload capital gains at 0% rate but this does give options to the occasional worker who is nominally early retired.

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The earned income credit acts as a functional 15.3% tax for those without children, 15.98% for those with one qualifying child, and 21.06% for those with two or more children. So add that into your calculations on Roth conversion of capital gain cashout. Personally, I could see a strategy for early retiree(s) with children to aim to take EITC while they have qualifying children, since the phaseout limit is $20k single/$26k married; while once the children are no longer eligible, to return to Roth conversions or 0% capital gain cashout because the threshold there is $11.6k/$17.5k and there would be standard deduction “wasted” just to capture the EITC.

The one issue is that you have to be comfortable with Medicaid, since you will most likely be under the limit to get subsidies, if you don’t get health insurance from the employer.

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