The Earned Income Tax Credit (EITC) is a benefit provided to working people with low to moderate income. The EITC reduces the amount of taxes you owe and might result in a refund. The earned income credit was created to offset Social Security taxes while giving people an incentive to work.
Here are the top 10 things to know about the Earned Income Credit:
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Who Qualifies for the Earned Income Credit
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In order to qualify for EITC you must have earned income and, if you don’t have a child, you must also have worked or someone, have run or a business or farm and earned less than $20,430 during 2016.
All applicants must:
- Have earned income; and
- Been a U.S. citizen or resident alien for the entirety of the tax year; and
- Have a valid Social Security Number for yourself, your spouse, and your qualifying children on your return.
If you have a child, he or she must meet all of the qualifying child rules. What does that mean? Your child must meet all of the IRS requirements to be your dependent for tax purposes, which includes having a social security number that was issued before the due date of the tax return and also must:
- Relationship: must be your son, daughter, adopted child, stepchild or a descendant of any of them such as a grandchild.
- Age: the child must be younger than you and younger than 19 at the end of the filing year or younger than 24 and a full-time student. The child can also be any age and permanently and totally disabled.
- Residence: the child must live with you or your spouse if you’re filing jointly in the U.S. for more than half of the year.
- Joint return: the child cannot file a joint return unless the child and the child’s spouse didn’t have a separate filing requirement and filed the return only for a refund.
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Income Limits to Qualify for the Earned Income Credit
Your earned income and Adjusted Gross Income (AGI) may not exceed:
| If Filing… | Claiming 0 Children | Claiming 1 Child | Claiming 2 Children | Claiming 3 Children |
|---|---|---|---|---|
| Single, Head of Household of Widowed | $15,010 | $39,617 | $45,007 | $48,340 |
| Married Filing Jointly | $20,600 | $45,207 | $50,597 | $53,930 |
Members of the Armed Forces don’t have to report nontaxable pay as earned income for EITC. Examples include combat pay, the Basic Allowance for Housing, and the Basic Allowance for Subsistence. You can choose to have your nontaxable combat pay included, because it may decrease the amount of tax you owe and might get you a larger refund. You should calculate your taxes with the combat pay as earned income and compare to find out what grants you the greatest return.
Do you think you missed out on the earned income credit from previous years? The IRS has an EITC Assistant that can help you find out your eligibility for this most recent tax year and the years prior.
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Investment Income Can Disqualify You from the Earned Income Credit
If you have more than $3,450 of income from rental properties, inheritance or stock dividends, then you won’t qualify for EITC. This means that any inheritance, for example, that exceeds $3,450 would disqualify you.
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Self-Employed Workers Can Apply for the Earned Income Credit
The IRS looks at all earned income to find your eligibility for the EITC. This includes income from self-employment and wages and tips from other types of pay. Long-term disability payments and union strike benefits also apply. If you have your own business, then that income applies, too.
The types of income that don’t apply include child support, retirement income, alimony, unemployment benefits, and Social Security benefits. Any earnings from working while in prison don’t count either.
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Ages to Qualify for the Earned Income Credit
As long as you were between 25 and 65 on December 31 of the tax year, then you may qualify for the earned income credit. Here are the birth date guidelines:
- You must have been born on or after January 1, 1953; and
- You must have been born on or before December 31, 1992; and
- You cannot be a dependent on someone else’s tax return.
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How to Claim the Earned Income Credit
You must file a tax return to claim EITC. If you have a qualifying child, then you need to file the schedule EIC to list your children and either the Form 1040A or Form 1040. If you don’t have a child who qualifies, then you can file Form 1040EZ or the 1040A or 1040.
Here are some of the documents you also need to prepare:
- Social Security Cards
- Birth dates for everyone on the return
Copies of your federal and state returns from last year - All income statements including your W-2s and 1099 forms
- All records of expenses like tuition payments and real estate taxes.
- Reporting forms such as the1095-A, 1095-B or 1095-C
- Routing numbers and account numbers so you can have your refund directly deposited
- The name of your dependent children and info for their paid caretakers.
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Tax Software Can Help with Claiming the Earned Income Credit
There are tax software systems available that can help determine your eligibility for the EITC. These programs usually help to ensure you calculate your income properly and account for all inclusions. Free File is one such resource that helps you do your federal taxes for free. Be wary of preparers who will take your money and prepare your return, but are trying to scam the system. There are penalties for being dishonest or fraudulent on your tax returns.
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Errors Can Cause You to Lose Access to the Earned Income Credit
If you were dishonest on your tax return, it’s possible that you can lose access to EITC for years to come. The IRS is strict on the rules for the EITC and you can have your access revoked for committing fraud or skirting the rules in some way. This limitation can last for two years and you may even be penalized by disallowing the credit for up to 10 years. This doesn’t apply to math errors.
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The IRS May Contact You About the Earned Income Credit
You might receive a letter stating that you qualify for EITC in order to have you submit a claim for it. The IRS may also ask you to send information to verify your EITC claim or provide you additional information about your claim. Check the letter/notice page to determine what you should do in the event that you receive a notice from the IRS.
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Timeline for Receiving your Refund from the Earned Income Credit
Claiming the EITC on your tax return means that IRS needs to hold your refund until mid-February, which includes the portion that’s not associated with EITC. You can track your refund using a tool or on the IRS2Go app.
The maximum credit amounts or Tax Year 2017 are as follows:
- $6,318 with three or more qualifying children
- $5,616 with two qualifying children
- $3,400 with one qualifying child
- $510 with no qualifying children
Many people overlook the earned income credit thinking that they don’t qualify. This often isn’t the case and people lose out on hundreds and sometimes thousands that they could be receiving with their tax returns. By investigating your circumstances closely, you’ll be able to assess whether or not you qualify for the earned income credit.
