Earned Income Tax Credit: What Is It & How to Qualify

The earned income tax credit was supposed to be a temporary measure when it was first passed by Congress in 1975. The idea was to curb the increasing number of Americans who were depending on welfare to make ends meet. The goal was to use the tax system to divert more income to these low-income workers. Then further legislation renewed the EITC provision to the tax code and even extended it.

The EITC works out to a percentage of a taxpayer’s earned income up to a maximum amount, and it’s intended as an incentive to get people to work. They’ll receive a portion of their earnings back as a refundable tax credit if they do – literally cash in their pockets. And yet, the Internal Revenue Service indicates that many qualifying Americans fail to claim the credit, maybe because its rules are complicated and intimidating.

This tax credit is aimed at low-income and moderate-income taxpayers, so you won’t qualify if you earn too much. Just how much is "too much" depends on how many children you have and whether you’re married and filing a joint return. The American Recovery and Reinvestment Act of 2009 increased the income limits for married earners from what they were originally, and more families can qualify as a result.

The gap between single filers and married filers is somewhat significant. You can actually claim the EITC even if you don’t support any qualifying children, but your income is limited to ​less than $21,430​ in this case as of the 2021 tax year if you’re single, filing as head of household, or a qualifying widow(er). You can earn ​up to $51,464​ if you have three or more children, even if you’re not a married filer.

Married taxpayers filing separate returns were previously barred from claiming this credit, but that changed with the American Rescue Plan Act of 2021, at least to some extent. These taxpayers can qualify ​in 2021​ if they haven't lived with their spouse at any point during the last six months of the 2021 tax year or they have a written separation agreement or a court order for separate maintenance. They must also have a qualifying child who lived with them for more than half the year

At the other end of the scale, you can earn ​up to $27,380​ if you’re married and filing jointly but have no children, and you can earn ​up to $57,414​ and still qualify if you’re married filing jointly and have three or more children.

As the name of this tax credit suggests, you must have at least ​some​ earned income to qualify, just not too much. The money doesn’t necessarily have to come from working for someone else, however. Self-employment income is fine. Income from long-term disability benefits and union strike benefits count as well, but income earned as an inmate does not.

It's adjusted gross income that matters, not your gross income, and this can sometimes make it a bit easier to qualify. Your AGI can be less than your gross income because it’s the resulting figure after you've subtracted certain “above-the-line” adjustments to income. You can find your AGI on line 11 of the 2021 Form 1040 tax return that you'll file in 2022.

Having unearned income in addition to earned income is OK – but again, not too much. Unearned income can include things like interest from a savings account or from selling property. It's basically income you received from a source other than a job or self-employment.

There are unearned income limits as well. Investment income is limited to ​$10,000 or less​ as of 2021 for purposes of qualifying for the EITC.

​Read More:​ How to Calculate Investment Earnings

Yes, there are still more rules:

• You have to have a valid Social Security number, and it must actually be a Social Security number, not an individual taxpayer identification number, which qualifies for some other tax breaks.
• Your spouse must have a Social Security number if you’re married.
• Social Security numbers must be issued to you before the due date for your tax return.
• You must be a United States citizen or a resident alien for the whole tax year.
  
• You can’t claim any foreign earned income.
• You can’t be the dependent or qualifying child of another taxpayer.

Not every low-income childless taxpayer can claim the EITC. You must meet additional rules if you have no children:

• You must be at least ​19 years old​ as of the last day of the tax year to claim the tax credit unless you're a qualified former foster youth or homeless youth. You need only be ​18 years old​ in this case.
• You must personally live in the U.S. for more than half the year.
  
• You can’t qualify as someone else’s qualifying child or dependent.

The word “qualify” is key with regard to the dependent rule. It doesn’t matter if that other person ​doesn’t​ claim you as a dependent. You’re disqualified from claiming the EITC even if they ​could​ have claimed you but didn't for some reason.

The American Rescue Plan Act also relaxed these rules a bit, but only for ​tax year 2021​. The minimum age is normally ​24 years old​, and you could be no older than ​age 64​. The age cap was waived for this one year by the ARPA.

The more qualifying children you have, the more your earned income credit will be, so it only makes sense that the IRS has some stringent rules about who your qualifying children can be as well.

Your biological child or adopted child certainly qualifies, as does your stepchild. Many foster children qualify, too. Siblings, step-siblings and half-siblings are fine, and the sons or daughters of any of these individuals will qualify as well. In other words, your grandchild, niece or nephew counts.

Foster children only qualify if they’re placed with you by a court order or state agency.

You have to be older than your qualifying child unless they're “permanently and totally disabled,” according to the IRS. Otherwise, you can’t claim the EITC for your 23-year-old sibling if you’re 21 and have a job, because they're older than you. There are also additional requirements:

• Your qualifying child must also be younger than ​age 19​ unless they're a full-time student. They must be younger than ​age 24​ if they're a student.
• Your qualifying child must also have lived with you in the U.S. for more than half the year, and they can’t be claimed as a dependent by anyone else.
• They must have a Social Security number, and it, too, must be issued before the due date of your tax return.

As of tax year 2021, the maximum credit amounts you can qualify for if all the stars align are:

• ​$6,728​ if you have three or more children
• ​$5,980​ if you have two children
• ​$3,618​ if you have only one child
• ​$1,502​ if you have no qualifying children

As you earn more within certain income thresholds, the credit begins decreasing until you become ineligible to claim it entirely. So if you’re single with one dependent child, your EITC would be greater if your earned income is $10,000 rather than $40,000, even though $40,000 in earnings falls within the threshold for being able to claim the credit for this filing status with one dependent.

​Read More:​ Tax Credits: What Are They & How Do You Qualify?

Yes, these calculations are complex, but the IRS will help you along. You can ask the agency to make the calculation for you. Instructions for doing this are included in IRS Publication 596 in the section titled “Figure B.”

The IRS asks that you not do this, however, unless you’re absolutely sure you qualify for the tax credit.

The IRS also offers the “EITC Assistant” online if you feel brave enough to tackle the calculations on your own with a little guidance. The best part about the Assistant is that it starts at the very beginning of the process and helps you determine if you even qualify for the EITC in the first place. It will let you know if your child or children meet all the rules for qualifying, and it will give you an estimate of how much of a tax credit you can expect to receive.

You can’t claim the EITC without filing a tax return, even if you earn so little that you’re not required to file a return at all. So file even if it's only to claim the tax credit, assuming you qualify. You must also file Schedule EIC with your return if you have qualifying children.

You might qualify for free help preparing and filing your return from any one of the leading tax preparation software providers if you earn ​less than $73,000​ in 2021 and you’re not self-employed. These providers have teamed up with the IRS to provide the Free File program for taxpayers who fall within certain income parameters, and some will do so even if your tax return includes claiming the complicated EITC.

The Free File website will walk you through the steps to determine whether you qualify for free assistance. The IRS also offers free tax preparation services by trained volunteers at some community locations, although these are reopening in phases after being temporarily closed due to the coronavirus pandemic.

​Read More:​ How Much Can You Make to Qualify for the EIC?

You’ll have to file an additional form with your tax return if you tried to claim the EITC in a previous year but it was disallowed. Form 8862 actually applies to several tax credits, one of which is the EITC. It essentially asks the IRS for permission to try to claim the credit again.

The bad news is that this form is three pages long. The good news is that you don’t have to complete Part III or Part IV for purposes of the EITC. These are for other tax credits.

You’re exempt from filing this form if you were denied due to a mathematical or clerical error, or if you were disallowed in the past only because your child turned out not to be a qualifying child, ​and​ you’re claiming this year without a qualifying child.

Unfortunately, you’ll have to wait ​two years​ if your EITC claim was disallowed due to “reckless or intentional disregard for the rules,” and ​10 years​ if your EITC claim was determined to be fraudulent.

You must also submit Form 8862 if one or more of your qualifying children are eligible to be claimed by any other taxpayer.

There’s a good reason why you might want to go through all the trouble and paperwork to claim the EITC. It’s one of the few credits offered by the IRS that’s refundable, and that’s a good thing, indeed.

Let’s say you have three qualifying children and you’re eligible for the maximum $6,728 tax credit. You complete your tax return only to realize that you had too little withheld from your paychecks all year, and now you owe the IRS $500. The IRS will use your EITC to erase that tax debt, and you’ll still have $6,228 of your tax credit remaining: $6,728 less your $500 tax bill.

The IRS will send you a check – or make a direct deposit into your bank account – for that remaining $6,228. Yes, it’s cold, hard cash. Of course, that’s yet another tax form you have to complete and submit with your return if you opt for direct deposit – Form 8888. The IRS has to know where to transmit the money, and this form details your bank account routing and account numbers.

It used to be that all you had to do to claim an EITC refund was determine if you qualified, figure out how much you qualified for, prepare your tax return along with the extra forms and send everything off to the IRS. It might have all been a challenge, but you’d have your money relatively quickly. Not anymore.

It turned out that a lot of people who weren’t actually entitled to claim the EITC were doing so anyway, and they were receiving their refunds before the IRS was able to collect all the necessary documentation from other sources to confirm their incomes and other data. Those checks were cashed before the IRS realized the errors, costing the federal government a good bit of money. So tax law was changed yet again to prevent this.

The Protecting Americans from Tax Hikes Act included a clause to address this problem when it was enacted in 2015. The PATH Act attempts to prevent this type of tax fraud from happening by not allowing the IRS to issue refunds resulting from the EITC or the child tax credit – another one that was commonly abused – until ​Feb. 15​ of the tax year. This gives the agency time to investigate potentially fraudulent returns. But look at it this way – by the time you complete all these forms, it might well be February before you manage to file your tax return.

This tax credit could actually be something of a double dip if you’re lucky. All these qualifying rules and filing steps relate to the federal tax credit, but 30 states plus Washington, D.C., Puerto Rico and Guam offer their own EITCs as of 2021. Nothing says you can’t claim both if you qualify. In fact, some municipalities offer them, too, so check your local ordinances. Just make sure to research your state-level rules because they might not be the same as the federal rules.