What Is the Earned Income Tax Credit?

Definition and Examples of the Earned Income Tax Credit

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The Earned Income Tax Credit is a refundable credit that's applied to any tax you might owe after you complete your return and calculate what's due. The IRS will send you a refund for the difference if there's any left over after it erases your tax debt. The amount of the credit varies depending on your income and how many dependents you have.

The federal government created the Earned Income Tax Credit in 1975 to help low-income taxpayers keep (and spend) more of their hard-earned money. It was intended to be just a temporary legislative provision, but the credit is still available in 2020 if you qualify according to several rules.

What Is the Earned Income Tax Credit?

The maximum Earned Income Tax Credit amounts for the 2019 tax year (the return you'll file in 2020) are:

  • $6,557 if you have three or more qualifying children
  • $5,828 if you have two children
  • $3,526 if you have one child
  • $529 if you have no children

These credit amounts increase annually to keep pace with inflation. They're set at $6,660, $5,920, $3,584, and $538 respectively for the 2020 tax year, the return you'll file in 2021.

          Acronym: EITC

How the Earned Income Tax Credit Works

The EITC is calculated by a percentage of income called the "credit rate." Taxpayers with the least income and larger families receive a greater credit as a result. The credit phases out entirely—and isn't available at all—to those with incomes over certain limits based on filing status.

You must have earned income to qualify, but you can't have too much. Earned income means wages and earnings from employment and net profits from self-employment.

Both your earned income and your adjusted gross income (AGI) must be less than a certain threshold to qualify for the EITC. Your AGI is your earned income minus certain adjustments for income that you don't have to pay taxes on, such as IRA contributions. Your AGI appears on line 8b of the 2019 Form 1040.

Your earned income and AGI must have been less than these amounts in 2019 if you use the single, head of household, or qualifying widower filing status:

  • $50,162 if you have three or more qualifying children
  • $46,703 if you have two children
  • $41,094 if you have one child
  • $15,570 if you have no children

Income limits increase for married taxpayers who file joint returns increase to:

  • $55,592 if you have three or more qualifying children
  • $52,493 if you have two children
  • $46,884 if you have one child
  • $21,360 if you have no children

Investment income can't exceed $3,600 as of tax year 2019. This includes interest, dividends, capital gains, and royalties. It might be reported on a 1099-MISC or, for dividends, on Form 1099-DIV. The institutions where you hold investments or accounts should send you copies of these forms shortly after the first of the year.

Pros and Cons of the Earned Income Tax Credit

You'll have to wait a little longer for your EITC refund, even if a portion of the refund is for taxes you overpaid during the year. The Protecting Americans from Tax Hikes (PATH) Act requires that the IRS must hold refunds that claim this credit until at least February 15. This allows the government some time 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.

This can be a fairly sizable tax credit for some taxpayers, however, so it's well worth waiting for.

Requirements for the Earned Income Tax Credit

You must attach Schedule EIC to your Form 1040 to claim a qualifying child or children for purposes of the EITC. Taxpayers must meet a few other rules to be eligible to claim this credit as well: 

  • You must have a valid Social Security number.
  • You must be a 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 anyone else.
  • You can't claim the foreign earned income exclusion, which relates to wages earned while living abroad.

Additional rules apply if you don't have a qualifying child:

  • You and your spouse, if you file jointly, must be between the ages of 25 and 64.
  • You must have lived in the U.S. for more than half the year.

Finally, you can't claim the EITC if your filing status is married filing separately, but if you and your spouse are separated and your spouse didn't live with you at any time during the last six months of the tax year, you might qualify to file as head of household. This status would allow you to claim the EITC.

Requirements for Qualifying Children

The rules for qualifying children for the EITC are slightly different than those for claiming dependents in general. The rules for qualifying children for EITC purposes are based on four tests:

  • The Relationship Test: The child must be related to you by birth, marriage, adoption, or must live with you under a 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.
  • The Age Test: The child must be age 18 or younger at the end of the tax year, or age 24 or younger and a full-time student for at least five months of the year. You can claim an individual for the EITC regardless of age if your dependent is totally and permanently disabled. You (or your spouse if you're married and filing a joint return) must be older than your dependent.
  • The Residency Test: The child must live with you in the United States for more than half the year, at least six months and one day. 
  • The Joint Return Test: A child you claim as a dependent for purposes of claiming the EITC cannot file a joint return with their spouse. One exception is if your dependent files a joint return solely to claim a refund and they don't claim any deductions or tax credits on their own return.

The child must also have a valid Social Security number issued before the date of your tax return, including any extensions to file that you request.

Consider asking the IRS for an extension of time to file if the tax deadline is looming and you don't yet have your child's Social Security Number. Requesting an extension is a simple matter of filing Form 4868 on or before Tax Day, and it will give you until October 15 to file your return.

Complete Form SS-5 if your child needs a Social Security number, and submit the form to the Social Security Administration. You must provide two documents that prove your child's age, citizenship status, and identity, and you'll need ID proving your own identity as well. The SSA provides a list of acceptable documents.

You should receive a Social Security card for the child within a couple of weeks if your request is approved.

Key Takeaways

  • The amount of the Earned Income Tax Credit is based on your income and how many dependent children you have. It increases as your income decreases and with each additional child.
  • Taxpayers with high incomes aren’t eligible for the EITC.
  • The Earned Income Credit is refundable, so the IRS will send you a check for any balance left over after it eliminates your tax bill.
  • Claiming the EITC will delay your refund until at least February 15. 

Article Sources

  1. IRS. "Earned Income Tax Credit Income Limits and Maximum Credit Amounts." Accessed June 22, 2020.

  2. Congressional Research Service. "The Earned Income Tax Credit (EITC): An Overview," Page 2. Accessed June 22, 2020.

  3. IRS. "Do I Qualify for the EITC?" Accessed June 22, 2020.

  4. IRS. "PATH Act Tax Related Provisions." Accessed June 22, 2020.

  5. IRS. "Publication 5334." Accessed June 22, 2020.

  6. IRS. "Qualifying Child Rules." Accessed June 22, 2020.

  7. Social Security Administration. "Social Security Numbers for Children," Pages 3-4. Accessed June 22, 2020.