Taxes are a burden for everyone, but especially for low-income individuals and families who need to hang onto as much money as possible.
Interestingly, low-income earners pay a much larger percentage of their salary to Social Security than high earners do, which makes their tax bite effectively larger. In an effort to help offset this effect and to encourage people to work, Congress created the earned income tax credit (EITC) in 1975.
The program is still going strong today and provides tax relief and extra income to low and moderate earners, especially to those with children.
Understanding the EITC
What Is the Earned Income Tax Credit?
The EITC is a refundable tax credit that provides a monetary benefit to those who work. If you have what the IRS refers to as “earned income,” you may qualify to collect an extra tax credit that can offset and even exceed any taxes you might owe.
Since it’s a refundable credit, the IRS will write you a check for the amount, even if you owe no tax at all. You can claim the credit if you have income from wages, salary, tips, commission, or self-employment. However, individuals who only receive Social Security, welfare, or pensions (or otherwise live off their investments) are not eligible for the EITC.
The credit is phased out at higher incomes, but limits increase for individuals or families with children.
Who Can Take the EITC?
There are a number of requirements regarding who can take the EITC, but many working Americans meet them:
- You must have earned income below the limit determined by your filing status and number of qualifying children (detailed below)
- You, your spouse, and any qualifying child you list on your tax return must have a Social Security number
- You cannot file as married filing separately, but any other filing status is fine
- You must be a U.S. citizen or resident alien all year, a nonresident alien married to a U.S. citizen, or a resident alien filing a joint return
- You can’t be a qualifying dependent of someone else
- You can’t have any foreign earned income, and investment income must be less than $3,400 for the year
- If you don’t have a qualifying child, you (or your spouse, if you file jointly) must be at least 25 years old but younger than 65 by the end of the year and not be someone else’s dependent. Both of you must also have lived in the United States for more than half the year.
What Is Considered “Earned Income” for the EITC?
All the traditional sources of earned income, such as self-employment profits, wages, salaries, and tips, are included. For EITC purposes, you can include union strike benefits and, if you are below minimum retirement age, long-term disability benefits.
You can also choose to elect your nontaxable combat pay as earned income for the purposes of claiming the EITC. Alimony, unemployment benefits, pensions, Social Security, and investment income, such as interest and dividends, are not considered earned income for the purposes of the EITC.
What Is the Advance EITC?
Until 2010, the Advance EITC was an option for workers that allowed them to receive their EITC credit in their paychecks during the year instead of as a lump sum at the end of the year. It did not change the amount of credit, just the timing of when it was received.
This is no longer available, but the EITC has otherwise not been affected.
EITC Income Limits for 2015
Since this credit is intended to benefit people with low incomes, it is only available to those whose income falls below certain limits. Taxpayers with children can earn more (and still qualify) than those without children, and the credit they receive may be larger as well.
Below are the income limits and the maximum tax credits available. Keep in mind that not everyone receives the maximum tax credit. Generally, if your income is very high or very low, the credit you receive will be low.
Your earned income and your adjusted gross income must each be less than:
- $47,747 ($53,267 married filing jointly) with three or more qualifying children
- $44,454 ($49,974 married filing jointly) with two qualifying children
- $39,131 ($44,651 married filing jointly) with one qualifying child
- $14,820 ($20,330 married filing jointly) with no qualifying children
The maximum tax credit you can get is:
- $6,242 with three or more qualifying children
- $5,548 with two qualifying children
- $3,359 with one qualifying child
- $503 with no qualifying children
As you can see, the credit amount and income limits are heavily weighted toward taxpayers with children, and particularly toward single-earner families. Remember, you cannot take this credit if you file as married filing separately.
Qualifying Children for EITC
Who Is a Qualifying Child?
Your tax credit will be much larger if you have at least one qualifying child. However, “qualifying child” covers more than just your children. How do you know if your child or other dependent relative is a qualifying child?
There are four tests a person must pass in order to be considered a qualified child:
1. Relationship. The person must be related to you in some way. He or she can be your:
- Son, daughter, stepchild, eligible foster child, adopted child, or a descendant of any of them (such as your grandchild)
- Brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them (such as your niece or nephew)
2. Age. The person must be one of the following:
- Under age 19 at the end of the year and younger than you (if you file a joint return, he or she must be younger than either you or your spouse)
- A full-time student under age 24 at the end of the year (if you file a joint return, he or she must be younger than either you or your spouse)
- Permanently and totally disabled at the end of the filing year, regardless of age
3. Residency. The person must have lived with you in the United States (or with your spouse if you file a joint return) for at least half the year.
4. Joint Return. Generally, you cannot claim anyone as a qualifying child who is filing a joint return. See the IRS site for details.
A person cannot be claimed as a qualifying child by more than one person. If this is a situation you think you will encounter, the IRS has provided tiebreaker rules.
Claiming the EITC
Determining Your Earned Income Tax Credit
Using the online EITC assistant is the easiest way to determine your credit. If you do not want to use the assistant and file on paper, you can leave the line blank and the IRS will calculate it for you. Also leave the lines below it blank (regarding over-payments or taxes owed) and the IRS will calculate your full refund. Most reputable tax preparation software programs can calculate the EITC as well.
How Do I Claim the EITC?
To claim the EITC, simply calculate the amount you are qualified to take and enter it on line 64A of your Form 1040. You can use any of the 1040 forms (1040, 1040A, or 1040EZ) to claim the EITC. If you have any qualifying children, you also need to complete Schedule EIC.
Keep in mind that many individuals who are eligible for the EITC are not legally required to file because they don’t earn enough money. However, filing your tax return is the only way to claim the EITC. If you might qualify for the EITC and do not file, you will definitely miss out on this credit.
State EITC Programs
In addition to the federal EITC, 25 states and Washington, D.C. offer their own earned income tax credit programs to residents. In general, the state EITC is a percentage of the federal EITC. In some states it is a refundable credit (meaning that you can get a refund of money from this credit over and above the amount of tax you owe). However, in other states, it’s not refundable (you will not receive a refund check in excess of the amount of tax you owe). The IRS maintains a list of states that participate and how much their percentage is.
The earned income tax credit is a big help for many lower-income individuals and families. Since many people who qualify for the EITC aren’t legally required to file a return, they miss out by not filing. If you think you qualified in previous years but didn’t take the EITC, you have three years from the date you filed your original tax return to amend it using Form 1040X.
Have you taken the EITC or advance EITC in the past? Are you expecting to take it again this year?