Every year, the federal government hands out money for free. However, one out of five people who are eligible doesn’t claim it. 

That sounds crazy, right? Who foregoes free money? And how can you be eligible to get it?

For all you know, you might be one of the crazy ones. This free money I’m talking about comes in the form of the Earned Income Tax Credit (EITC). In 2020, the government handed out $57 billion in EITC alone. That means there was $14.25 billion last year up for grabs and some of it could have been yours.

What Is The Earned Income Tax Credit?

The EITC is the government’s attempt to offset some of the payroll taxes for lower-income workers. Everyone pays payroll taxes at a flat rate (more or less). It is not a progressive system like income taxes where those with more earnings pay a larger percentage of their income. To make things more progressive and lighten the load on those that don’t make as much, they created the Earned Income Tax Credit. 

The EITC is a refundable credit. That means first it is used to offset your income tax bill. If you’ve taken your tax liability down to $0 without using up all of the EITC, then the IRS will cut you a check for the remainder. Pretty nice, huh?  

How Does The Housing Allowance Affect The Earned Income Tax Credit?

The EITC is based on income, which is rather straightforward for most people. But not pastors. Does the housing allowance count as income or not? The answer to that question flips back and forth depending on the government program or tax benefit that you’re referring to. In this case, the answer is both yes and no. Like I said, not very straightforward.

If you have opted out of Social Security with Form 4361 or Form 4029, then your housing allowance DOES NOT count as income for purposes of calculating the Earned Income Tax Credit. If you’re exempt from self-employment taxes, then your housing allowance is exempt from counting towards the EITC. When you do still participate in the Social Security system, then your housing allowance DOES count as income for the EITC. It is part of your net self-employment income.

No Social Security = No Housing Allowance

Yes Social Security = Include Housing Allowance

How To Claim The Earned Income Tax Credit

If 20% of the people eligible for this refundable tax credit don’t claim it, how do you know if you’re one of them? The IRS has a nifty calculator, called the EITC Assistant, to help you. You’ll need to input your income, so make sure you are including/not including your housing allowance per the guidelines above. 

The first step in claiming the tax credit is filing a tax return. Even if you don’t owe any taxes, you will need to file a return in order to claim the credit. If you file your own taxes, make sure to follow the IRS instructions for calculating the EITC carefully. Here is a handy list that they’ve published of errors to watch out for. The EITC is a part of the regular Form 1040 tax return, so you will see it come up as you fill out your forms. When using tax preparation software, make sure that things are calculated correctly, because not all software is programmed properly for the minister’s housing allowance!

After reading this, you may be thinking about previous years’ returns and wondering if you missed out on some money. Worry not! You can claim the EITC for prior years by filing an amended return. This IRS page has all of the information you need in order to do it.

If you are looking for a tax preparer, there is a list of reader-recommended professionals at the end of this article.