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What is the Earned Income Tax Credit?

By Louis DeNicola

The Earned Income Tax Credit (EITC) is a federal tax credit that's intended to help low- to moderate-income workers.

Millions of people qualify for the EITC each year, but about 20 percent of eligible tax filers don’t claim it.

That’s unfortunate as it’s been a boon for those who do claim it: For the 2015 tax year, more than 26 million tax filers received over $65 billion in tax credits due to the EITC.

While deductions reduce your taxable income for the year, tax credits generally offer a potentially larger benefit by offsetting your taxes due on a dollar-to-dollar basis.

The EITC is also a “refundable tax credit,” meaning you may still get money back even if you had no tax withheld.

You can use the Internal Revenue Service's (IRS) EITC Assistant tool to see if you'll qualify for the credit.

Here’s what this article will cover:

1. Changes to the EITC for 2016
2. What you need to apply for the EITC
3. What influences your eligibility and how much you’ll receive
4. What could make you ineligible
5. Ways to save when filing a tax return with an EITC

 

Changes to the EITC for the 2016 tax year

There were several notable EITC-related changes for the 2016 tax year.

If you claim the EITC or the additional child tax credit and are owed a tax refund, your tax refund won't be released until at least Feb. 15, 2017.

The IRS plans to use this additional time to help prevent refund fraud and identity theft.

 

What you'll need to apply for the EITC

To claim the EITC, you'll need to file a tax return using Form 1040, 1040A or 1040EZ.

You don't need to have a child to get the EITC. However, if you're claiming a qualifying child, you'll have to file a Schedule EIC with your return, and you won’t be able to use Form 1040EZ.

Schedule EIC is where you'll fill in information about qualified children, including their names, ages, Social Security numbers, relationship to you and how long they lived with you during the year.

 

What influences your eligibility and how much you'll receive?

Michael Raanan, a former IRS agent and president of Landmark Tax Group in Santa Ana, California, says, "to qualify [for EITC] you must meet certain requirements and file a tax return, even if you're not required to file a return for the year."

For 2016, your earned income and adjusted gross income (AGI) must be less than the following amounts (based on your filing status and qualifying children): 

2016 tax year income limits
Filing status Qualifying children claimed
Zero One Two Three or more
Single, head of household or widowed $14,880 $39,296 $44,648 $47,955
Married filing jointly $20,430 $44,846 $50,198 $53,505


To qualify, you also can't have more than $3,400 in investment income for the year.

Investment income generally includes things such as interest and dividends; royalties and rental income from personal property; and capital gain net income.

In addition to income limitations, the amount of EITC you receive can vary based on filing status and family size. Generally, if you have one or more qualifying children, you'll get a larger credit than if you don't have any qualifying children. You should also keep in mind that if you meet the rules for having a qualifying child and don’t claim the EITC with a qualifying child, you can’t claim the EITC without a qualifying child.

Here's the maximum amount you might receive based on the number of qualifying children you can claim:

Maximum EITC
Number of qualifying children 2016 tax year
Three or more $6,269
Two or more $5,572
One $3,373
Zero $506

Gail Rosen, a CPA in Martinsville, New Jersey, says that in addition to living with you for more than half a year, a qualifying child must:

  • Be a child, adopted child, stepchild, eligible foster child, sibling, half-sibling, step-sibling, or descendant of one of them, and 
  • Not have filed a joint return, or if your child and his or her spouse did file a return, only filed a return only to claim a refund and were not required to file a return, and
  • Be under 19 years old as of the end of the year, or
  • Be a full-time student under 24 years old as of the end of the year, or 
  • Be permanently and totally disabled at any time during the year.

A qualifying child also cannot be a dependent or qualifying child of another tax filer, and there are also additional requirements, like a U.S. residency requirement, that you may need to consider in certain situations.

If you're not claiming a qualified child:

  • You (or your spouse if you’re filing jointly) must be at least 25 and under 65 years old at the end of the tax year, and
  • You (and your spouse if you’re filing jointly) can't be a dependent or qualified child of another tax filer, and
  • You (and your spouse if you’re filing jointly) must have lived in the U.S. for over half the year.

There are special rules for members of the military, clergy, ministers, and people receiving, or whose children are receiving, disability benefits.

Rosen also reminds tax filers, "if you qualify for the earned income credit and have a qualifying child, you may also qualify for the child tax credit."

You can claim both credits as long as you meet the requirements.

 

What could make you ineligible for the EITC?

There are various additional requirements you must meet to qualify for the EITC. For example, you must have earned income.

Earned income generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment.

Also, in addition to other restrictions that may apply, you won't qualify if:

  • Your filing status is “Married filing separately.”
  • You’re filing Form 2555 or Form 2555EZ, related to income earned in foreign countries and deductions for housing in foreign countries.
  • You weren't a U.S. citizen or resident alien for the entire year.
  • You're a qualifying child for another taxpayer.
  • You, your spouse (when filing jointly), and all others you would list on Schedule EIC don't have a Social Security number that's valid for employment.

If you're separated and your spouse hasn't lived in the home for more than six months of the tax year, you may be able file as a “Head of household” and may be able to claim the EITC.

"If parents of a qualifying child are divorced, generally only the custodial parent can claim the child as a qualifying child for purposes of the EITC," Raanan says.

 

Avoid paying excessive fees to file a tax return with the EITC.

Filing your tax return can be stressful and time-consuming, but there may be inexpensive or free options available to you.

Dean Ferraro, owner of Authoritax in Mission Viejo, California, suggests tax filers who earned less than $54,000 and need some extra help can look for a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) center. Both programs offer free tax preparation and filing services from an IRS-trained volunteer.

If you’re ready to file on your own, you can also use Credit Karma Tax to help you walk through your taxes step-by-step and file your federal and state taxes for free.

 

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

Disclaimer: We know taxes are complicated, so we provide this information for general educational purposes only. It isn’t intended to be personalized legal, financial or tax advice, and we don’t guarantee the accuracy, completeness or reliability of this content. If you have questions about your personal tax situation, consider contacting an accountant, tax attorney or financial advisor. Come back to Credit Karma Tax when you’re ready to file your taxes for free!

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