Taxes are a burden for everyone, but especially for low-income workers and families who need to hang onto as much money as possible.
The federal income tax is a progressive tax system, meaning high-income taxpayers pay higher rates than people with lower incomes. However, Social Security and Medicare taxes aren’t progressive. Low-income wage earners end up paying a much larger percentage of their salary toward payroll taxes than high earners do, making their tax bite effectively larger. 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-income earners, especially working families with dependent children.
Understanding the EITC
The EITC is a federal tax credit that benefits people who work. It’s a refundable tax credit, meaning if it reduces your tax bill to zero, you can receive a refund over and above the amount of tax withheld from your paycheck during the year.
To qualify for the credit, you need to have what the IRS refers to as “earned income.” This includes wages, salary, tips, commission, or income from farming 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.
Filers with children are eligible for larger credits than those without children, but the credit phases out at higher incomes.
Who Can Take the EITC?
There are several requirements for claiming 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.
- You, your spouse, and any qualifying child you list on your tax return must have a Social Security number. You cannot claim the EITC using an Individual Taxpayer Identification 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 or file a joint return with a U.S. citizen or resident alien who you married on or before Dec. 31 of the tax year.
- You can’t be a qualifying dependent of someone else.
- You can’t have any foreign earned income that would require you to file Form 2555, and your investment income must be less than $3,650 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. Both of you must also have lived in the United States for more than half the year.
What Does the IRS Consider “Earned Income” for the EITC?
Earned income includes all the traditional sources of income – like self-employment profits, wages, salaries, and tips. For EITC purposes, you can claim union strike benefits and, if you’re below minimum retirement age, long-term disability benefits.
You can also elect to have your nontaxable combat pay included in earned income to claim the EITC.
Some examples of income the IRS doesn’t consider earned income for EITC purposes include:
- Alimony and child support
- Unemployment benefits
- Retirement income, including Social Security and pensions
- Investment income, such as interest, dividends, and capital gains
- Pay received for work while an inmate in a penal institution
EITC Income Limits for 2020
Since the EITC’s purpose is to benefit people with low incomes, it’s only available to those whose income falls below certain limits.
The income limits and the maximum tax credits available vary based on your marital status and and number of children. Taxpayers with children can earn more – and still qualify – than those without children, and the credit they receive may be more substantial as well. Keep in mind that not everyone gets the maximum tax credit.
Your earned income and your adjusted gross income (line 11 of Form 1040) must each be less than:
- $50,954 ($56,844 married filing jointly) with three or more qualifying children
- $47,440 ($53,330 married filing jointly) with two qualifying children
- $41,756 ($47,646 married filing jointly) with one qualifying child
- $15,820 ($21,710 married filing jointly) with no qualifying children
The maximum credit you can get is:
- $6,660 with three or more qualifying children
- $5,920 with two qualifying children
- $3,584 with one qualifying child
- $538 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.
Qualifying Children for EITC
To claim the EITC, your child must meet the IRS definition of a qualifying child.
Who Is a Qualifying Child?
The term “qualifying child” covers more than just your biological or adopted children. The IRS has a four-part test to help you determine if someone is a qualifying child:
- Relationship. The person must be related to you in some way. They 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)
- Age. The person must be under age 19 at the end of the year or a full-time student under the age of 24 at the end of the year. If you file a joint return, the qualifying child must be younger than either you or your spouse. However, if the person is permanently and totally disabled at the end of the year, the age requirements don’t apply.
- Residency. The person must have lived with you in the United States – or with your spouse if you file a joint return — for more than half the year.
- Joint Return. Generally, you cannot claim as a qualifying child anyone who is filing a joint return with a spouse. There is an exception for when the child and the child’s spouse were not required to file a tax return because they did not earn enough income, and they only filed a joint return to claim a refund of taxes withheld.
Only one person can claim an individual as a qualifying child. If more than one person believes they can claim someone as a qualifying child, IRS Publication 596 includes tiebreaker rules to help you determine who gets to claim the credit.
Claiming the EITC
Once you’ve met the eligibility requirements of the EITC, here’s how to calculate the credit and claim it on your tax return.
Determining Your Earned Income Tax Credit
Using reputable tax preparation software from a company like H&R Block or working with a qualified tax preparer is the best way to calculate your credit. If you prefer to prepare your return on your own, you can also use the IRS’ online EITC Assistant to determine your credit.
The IRS offers some taxpayers an option to have the IRS figure their EITC for them. To ask the IRS to calculate your credit, you must file a paper return and follow the steps outlined in Publication 596.
How Do I Claim the EITC?
To claim the EITC, calculate the amount you’re qualified to take and enter it on line 27 of Form 1040. If you have any qualifying children, you must also complete Schedule EIC.
Remember, some individuals who are eligible for the EITC are not legally required to file a tax return because they don’t earn enough money. However, filing a tax return is the only way to claim the EITC. If you believe you qualify for the EITC but don’t need to file a return, you can file a tax return anyway to claim a tax refund.
State EITC Programs
In addition to the federal EITC, 26 states and the District of Columbia offer their own earned income tax credit programs to residents. Typically, the state EITC is a percentage of the federal EITC. In some states, it’s a refundable credit. In others, it’s nonrefundable, meaning you won’t receive a refund over and above the amount of tax you paid in for the year. 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 some 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.