The 2016 Earned Income Tax Credit

A Refundable Tax Credit for Low-Income Workers

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The federal government created the earned income tax credit to help low-income and some middle-income families and individuals keep more of their money. It's a refundable credit so if there's any left over after it erases your tax debt, the IRS will give you a refund for the difference. The amount of the credit varies depending on your income and how many dependents you have. 

Earned Income Tax Credit Amounts for 2016

The maximum tax credits for 2016 are: 

  • $6,269 if you have three or more qualifying children
  • $5,572 if you have two qualifying children
  • $3,373 if you have one qualifying child
  • $506 if you have no qualifying children.

Income Limitations

You must have earned income to qualify for the credit, but you can't have too much. Earned income means wages and net profits from self-employment. Wages are reported on Form W-2. Self-employment income is generally reported on Form 1099-MISC.

Both your earned income and your adjusted gross income or AGI must be less than certain to qualify for the earned income tax credit. Your AGI is your earned income minus certain adjustments for income that you don't have to pay taxes on, such as alimony you've paid or IRA contributions. It appears on line 37 of Form 1040, on line 21 if you file Form 1040A, and on line 4 of Form 1040EZ. 

In 2016, your earned income and AGI must be less than:

  • $47,955 (or $53,505 if you're married and filing jointly) with three or more qualifying children
  • $44,648 (or $50,198 if you're married filing jointly) with two qualifying children
  • $39,296 (or $44,846 if you're married filing jointly) with one qualifying child
  • $14,880 (or $20,430 if you're married filing jointly) with no qualifying children

Investment Income Limitations

If you have any investment income, it can't exceed $3,400.

Investment income includes interest, dividends, capital gains and royalties. It may be reported on a 1099-MISC or, for dividends, on Form 1099-DIV. The institutions where you hold investments should send you copies. 

Who Is a Qualifying Child for the EITC?

The rules for qualifying children for the EITC are slightly different than those for dependents. You might be able to claim a child for your dependent but not for the EITC, or you might qualify for the EITC even though the non-custodial parent claims the child as a dependent. The rules for qualifying children are based on four tests. 

  • Relationship Test: The child must be related to you by birth, marriage, adoption or foster arrangement. The child can be your son, daughter, stepchild, grandchild, niece, nephew, brother, sister or an eligible foster child. Adopted children are treated the same as children by birth. Foster children must be placed in your care by an authorized placement agency.
  • Age Test: The child must be age 18 or younger at the end of the tax year, or age 23 or younger and a full-time student. If your dependent is totally and permanently disabled, you can claim him for the earned income credit regardless of his age.
  • Residency Test: The child must live with you in the U.S. for more than half the year. This means at least six months and one day. 
  • Joint Return Test: The child you claim as a dependent for the earned income credit cannot file a joint return with his or her spouse. One exception is if they file a joint return solely to claim for refund and they don't claim any deductions or tax credits. 

The child must also have a valid Social Security number. 

Finally, you can't claim the earned income tax credit if your filing status is married filing separately. But if you and your spouse are separated and your spouse did not live with you at any time during the last 6 months of the year, you may be able to file as head of household and this would allow you to claim the earned income credit.

You must attach Schedule EIC to your Form 1040 to claim a qualifying child or children.

 

EIC Requirements for Taxpayers

Taxpayers must also meet a few rules to be eligible to claim the EITC: 

  • You must have a valid Social Security number.
  • You must be U.S. citizen or a resident alien for the entire year.
  • You — and your spouse if you're married — can't be claimed as a qualifying child by someone else.
  • You can't claim the foreign earned income exclusion which relates to wages earned while living abroad. 
  • You and your spouse must be between the ages of 25 and 64.

Earned Income Credits Available from State and Local Governments

Several state and local governments offer their own versions of earned income credits. Some are based on the federal earned income amounts, but others use their own calculations. 

The EITC and the PATH ACT 

Beginning in 2017 for 2016 tax returns, you'll have to wait a little while for your EITC refund, even if a portion of your expected refund is for taxes you overpaid during the year. The Protecting Americans from Tax Hikes or PATH Act requires that the IRS must hold refunds claiming this credit until Feb. 15 to allow the government to investigate the possibility of fraudulent claims. A delayed refund doesn't mean the IRS suspects you of fraud. The rule applies to all tax returns claiming the EITC.