Earned Income Tax Credit

What’s Earned Income Tax Credit

The Earned Income Tax Credit(EITC), sometimes called the EIC is a refundable tax credit for eligible low- and moderate-income workers. It’s an anti-poverty tax benefit. Taxpayers can claim this credit whether single or married or have children or not. The main requirement is earning an income (like some sort of IRS “work bonus plan”).

The amount of credit depends on;

• Tax-filing status,
• income and
• The number of children (family size).

Qualifying taxpayers whose credit exceeds their tax liability will be due for a refund on the overage on a dollar-for-dollar basis. Taxpayers are still scheduled for a refund even if they do not owe income tax (cash refund).

For the 2022 tax year (filed in 2023), the tax credit ranges from $560 to $6,935($600 to $7,430 in 2023 and will be filed in 2024).

For 2021 tax returns EITC rules were relaxed due to the Covid-19 crisis. More credits were available to more childless taxpayers and IRS allowed taxpayers to base the EITC on 2020 or 2019.

How does the EITC work

• EITC is a refundable credit, so Refunds are due on any overage.
• Only qualified taxpayers can claim the EITC and they have to meet income qualifications. Also, their investment income cannot be above the stated thresholds.
• A taxpayer cannot be disqualified for EITC because they don’t have any children. However, the more children you have, the higher the credit amount will be.
• EITC is claimed in the tax return, IRS will process and issue a refund in mid-February.

Income limit for Earned Income Tax Credit

• For purposes of the EITC, “earned income” generally includes taxable wages, salaries, tips, and other taxable employee pay, and net earnings from self-employment.
• Employee compensation qualifies as earned income only if it is subject to tax. nontaxable employee pay, such as certain dependent care benefits and adoption benefits is excluded (the only exception is nontaxable combat pay).
• Beginning the tax year 2021, married and filing separately is allowed under special rules.

1. the spouse claiming the credit must have a qualifying child living with them for more than half the year.
2. The couple has not lived together for the last six months or has a separation agreement or decree.

Earned Income Tax Credit 2022

A taxpayer is not eligible if they have investment income (Interest-both taxable and nontaxable, and capital gain distributions) of more than $10,300 in 2022 ($10,000 in 2021).

The maximum credit for 2022 (taxes filed in 2023) is capped at $6,935. EITC will rise with any increase in earned income until it reaches the maximum amount, then it will gradually phase out. Families with more children are eligible for higher credit amounts.

Earned Income Tax Credit table

Earned Income Tax Credit 2023

The maximum credit for 2023(taxes filed in 2024) is capped at $7,430. The earned income tax credit is adjusted to account for inflation each year.

Earned Income Tax Credit table

Who qualifies for the EITC

A taxpayer will qualify for the EITC if:

• The taxpayer (and their spouse if filing a joint return) is at least 19 years of age.

1. If you’re claiming the EITC without any qualifying children, you must be at least 25 years old, but not older than 65.
2. If you’re claiming jointly without a child, only one spouse needs to meet the age requirement.

• You (and your spouse if filing a joint return) and any qualifying children have a Social Security number(SSN) that is valid for employment; AND

• The taxpayer (and the spouse if filing a joint return) are a U.S. citizen or resident alien, and lived in the states(or the U.S. Commonwealths and territories of Puerto Rico, U.S. Virgin Islands, Guam, the Commonwealth of the Northern Marina Islands, or American Samoa.) for more than half of the tax year; AND
• You (and your spouse if filing a joint return) are not dependent or qualifying children of another person; AND
• The couple is not married and filing separately unless done under the special rule; AND
• May have some investment income in that tax year that did not exceed $10,300 in 2022($11,000 in 2023, and $10,000 in 2021); AND
• The taxpayer earned at least $1 of earned income from work (taxable work income which includes wages, salary, tips, employer-based disability, military pay, or union strike benefits) or running a business/farm (pensions and unemployment income do not count); AND
• Not filing Form 2555 or 2555-EZ (related to foreign earned income and  Foreign Earned Income Exclusion.)

The military personnel and the clergy have special earned income credit rules. The same applies to people who have disability income or who have children with disabilities.

A child will qualify for the EITC if:

They pass the three tests below;

• Related to the taxpayers (and their spouse if filing a joint return): They can be biological, adopted, stepchild, foster child, or grandchild. The child also includes your sibling, half-sibling, step-sibling, or any of their children.
• Right Age: They must be under 19 years of age at the end of the tax year, and younger than the taxpayer (and their spouse if filing a joint return), OR, under 24 years of age if in college as a full-time student. There’s no age limit for children who are permanently and totally disabled.
• Residency: They must have lived with the taxpayer (and their spouse if filing a joint return) in the United States for more than half the year. This Time doesn’t have to be continuous.

Each child a taxpayer is claiming EITC for will need to have:

• A Social Security number(SSN).
• Their birthdate.

Each child must qualify for EITC- A taxpayer will be eligible for less EITC if the qualifying children do not have valid SSNs. They will be eligible for increased EITC (for up to 3 children) if the qualifying children have valid SSNs.

If none of the qualifying children have valid SSNs, a taxpayer can still qualify for a lesser EITC that is available to workers without qualifying children.

Lastly, there are no age requirements for claiming the EITC if the taxpayer has one or more qualifying children

How to claim Earned Income Tax Credit

To claim EITC, workers must;

• Have valid Social Security numbers (SSN) for themselves (and their spouse if filing a joint return), and for each qualifying child claimed for the EITC. The SSNs must have been issued before the due date of the Form 1040 return, including extensions. There are special rules for those in the military or those out of the country.
• File a tax return and claim the credit, even if their earnings were below the filing requirement or they do not owe any tax. The taxpayer must submit “Schedule EIC” on their Form 1040 for each eligible child.

Bottom line

• Taxpayers earning $55,952 or less in 2022 qualify for EITC. This can easily be confirmed using the EITC Assistant tool at irs.gov/eitc. The EITC Assistant will explain in detail why the taxpayer doesn’t qualify for the EITC.
• Any refunds received from the federal income tax return cannot be counted as “earned income” when determining eligibility for EITC.
• Taxpayers (and their spouse if filing a joint return) need to have a valid SSN (authorized to work and not for claiming federally funded benefits, such as Medicaid) issued by the due date of their return (including extensions) to be eligible for EITC.