What's the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is a credit the federal government offers to taxpayers who earn low-to-moderate wages. While the EITC was created in 1975 to assist low-income families, it has evolved over the last 40-plus years to offer advantages to single filers also. Individuals who are 25 and older and annually earn less than $14,590 can qualify for a refund of as much as $496 through this credit.
The credit is refundable, meaning it can lower your tax bill, and when lowering below $0 it can also generate a refund for you. Both single and married people, with and without qualifying dependents, may qualify for the EITC as long as they earn some income in the applicable tax year. It is eligible for taxpayers who are employed by an employer and also self-employed. You must file a tax return to claim an EITC , even if you're otherwise not obligated to file a return.
The EITC's basic qualifying standards are the same as with any other deduction or credit. You need to have a social security number, the names and social security numbers of your dependents, and your W-2, 1099, as well as all other documents stating income. You also must have been a U.S. citizen or legal resident alien during the previous tax year to quality for the tax credit. If you wish to file online, you will need last year's tax return handy because you'll also need information such as your adjusted gross income, to electronically sign your filing.
The IRS has income thresholds that determine whether you qualify for the EITC. For the tax year ending December 31, 2016, income must not have exceeded $14,880 for single filers with no dependents, and $20,430 if you're married filing jointly, and have no dependents. Single people with one dependent can earn up to $39,269, up to $44,648 with two dependents, and up to $47,995 with three or more dependents. Married people filing jointly with one dependent can earn up to $44, 846 and still claim the EITC. Those with two dependents can earn up to $50,198, and those with three dependents can earn up to $53,505.
The EITC credit amounts for the tax year ending in 2016 are as follows:
- $6,269 with three or more qualifying dependents
- $5,572 with two qualifying dependents
- $3,373 with one qualifying dependent
- $506 with no dependents
For those with dependents, the credit can be substantially more. Unfortunately, the IRS notes that nearly 20 percent of those eligible for the EITC fail to claim it. There are a few causes for someone not to be eligable for this credit. For example, if you earn income from investments, more than $3,400 annually, you won't qualify. You also don't qualify if you claim foreign income on your U.S. tax return. In additional to the EITC, if you qualify for the Additional Child Tax Credit, you can still claim the EITC, but the IRS may postpone your refund until after February 15.
Earned Income Tax Credit Eligibility Checklist
Here is a "due diligence" checklist gleaned from IRS Form 8867 and IRS Publication 3524 designed to determine eligibility:
- Complete the EIC (Earned Income Credit) and/or the CTC/ACTC (Child Tax Credit/Additional Child Tax Credit) worksheets on any Form 1040 and/or the American Opportunity Tax Credit (AOTC) worksheet on Form 8863.
- Ensure everyone listed on the return, including dependent children, has a valid Social Security number. There is a separate procedure for filing with Individual Taxpayer Identification Numbers (ITIN) or Adoption Taxpayer Identification Numbers (ATIN).
- Understand variables between filing jointly, as head of household, as a widow(er) or as a single adult. Consult IRS Publication 501 for ascertaining filing status. Those filing as "married filing separately" do not qualify for the EITC.
- Do not file for an EITC if investment income exceeds $3,400.
- Accurately document verifiable income. To qualify, total earned adjusted gross income (AGI) must be at least $1 and be less than: $14,880 ($20,430 if married filing jointly) without a dependent child; $39,296 ($44,846 if married filing jointly) with one qualifying child; $44,648 ($50,198 if married filing jointly) with two dependent children; $47,955 ($53,505 if married filing jointly) with three or more qualifying children.
- Ensure the child or children being claimed as dependents are not also being claimed by someone else on another return. This can be an issue among former spouses or among relatives. If more than one person claims the same child, a mistaken filer must return the credit with penalties and interest. There are "tie-breaker rules" on Form 3524 to help answer any questions.
- The child must permanently live in a home within the United States. There are special rules that apply for temporary absences, kidnapped children and for military dependents on extended duty outside the U.S.
- File for an EITC for totally and permanently disabled adults that live in the household as if for a dependent child.
The EITC 'Delay'
With the adoption of the Protecting Americans from Tax Hikes (PATH) Act in 2015, the IRS will no longer issue tax returns that claim the EITC or ACTC until after Feb. 15. The PATH Act provides more time for the IRS to review and validate EITC claims.
You can find more related information on this topic and other tax credits on these pages: