The Earned Income Tax Credit

In 1975, the Earned Income Tax Credit (EITC or EIC) was introduced. The point of this tax credit was to help lower income families financially. It provides a subsidy to help with financial woes. There are eligibility requirements that must be met and an income tax return has to be filed by families who wish to claim this credit. Even in the case that you are not required to file one or you owe absolutely no tax at all.

The EITC is a refundable tax credit: you can have your tax liability reduced beyond zero when you claim the EITC. This means that you can claim the rest as a tax refund. Even if you don’t usually have to file a tax return, you should do so to see if you can claim the EITC. 

Income from wages, salaries or tips, from owning or running a business farm, or certain disability income are coined by the IRS as “earned income.” The IRS determines applicability for the Earned Income Tax Credit under the following rules.

1. Social Security Numbers

A Social Security Number is required by you and your spouse if you are filing your tax return under the status ‘married filing jointly’. Earned Income Tax Credit cannot be claimed if you or your spouse are a non-citizen with an Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number (SSN).

2. EITC Income Limits

You can find your  Adjusted Gross Income (AGI) on Line 37 of Form 1040, Line 21 of Form 1040A, or Line 4 of Form 1040EZ. If each of your AGI and earned income are less than the amounts listed below, then you are eligible for to claim EITC.

  • $14,880 (or $20,430 if married filing jointly) with 0 qualifying children
  • $39,296 (or $44,846 if married filing jointly) with 1 qualifying child
  • $44,648 (or $50,198 if married filing jointly) with 2 qualifying children
  • $47,955 (or $53,505 if married filing jointly) with 3 or more qualifying children

3. Maximum Credit Allowed

The maximum credit for the tax year 2016 is:

  • $6,269 with three or more qualifying children
  • $5,572 with two qualifying children
  • $3,373 with one qualifying child
  • $506 with no qualifying children

4. Qualifying Child Rules

A child must have a Social Security Number and be a close relation of yours, meet age restrictions, and complete a residency test to be eligible for EITC. Commonly he or she must be younger than 19 years of age, or 24 years of age if they’re studying full-time, and be residing with you in the United States for more than 6-months of the year. If your qualifying child is married, they cannot file a joint tax return with their own spouse – unless they are only filing for a tax return.

5. Filing Status Requirement

To be eligible for the EITC, a “married filing separately” filing status will not work. To qualify for this tax credit your filing status must be single, married filing jointly, head of household, or qualifying widower with dependent child. The IRS is pretty strict on this so be sure you file under the correct status.

6. Foreign Residents and Foreign Income

Being a U.S. citizen or resident alien for the entire tax year is a mandatory requirement in order to claim the Earned Income Tax Credit. A joint tax return can be filed and a request to be treated as a resident alien made in the case that you are a nonresident alien married to a U.S. citizen or resident alien. Read IRS Publication 519 (U.S. Tax Guide for Aliens) for further information.

Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion) cannot be filed in the case that you want to claim the EITC. For U.S. citizens and resident aliens living and working abroad, the Foreign Earned Income Exclusion is applicable.

7. Investment Income Limit

In order to be eligible for the Earned Income Credit, your investment income must be no more than $3,400 for the tax year. Interest, dividends, and capital gains are included in your total investment income for the purposes of the EITC. Royalties, and passive activities from Schedule E are also included though a majority of taxpayers are not required to deal with them.

How to Claim the Earned Income Credit

Line 66a of Form 1040, Line 42a of Form 1040A, or Line 8a of Form 1040EZ reports the EIC. A Schedule EIC (Earned Income Credit) needs to be filed with your Form 1040 if have a child who is eligible. Schedule EIC is not required to be used in the case that you claim credit without a qualifying child.

Information about each qualifying child you are claiming for the tax credit is what the Schedule EIC is designed to provide the IRS with. In the case that you have more than 3 eligible children, you need to report only 3 of them on Schedule EIC.

To assist you in figuring out your eligibility for credit, an EITC Assistant is available on the IRS website.

You are encouraged to look into IRS Publication 596, Earned Income Credit (EIC) to gain further information about this tax break.

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