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

The earned income tax credit was supposed to be a temporary measure when it was first passed by Congress back in 1975. The whole 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 as a refundable tax credit if they do – literally cash back in their pockets. And yet, the Internal Revenue Service indicates that many qualifying Americans fail to claim the credit, maybe because its rules are so complicated and intimidating.

Tips

  • The EITC isn’t a flat amount for everyone who qualifies. It steadily increases based on the number of qualifying children a taxpayer supports. It also depends on your filing status.

Earned Income Tax Credit Income Limits

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 you can earn depends on how many children you have and whether you’re married and filing a joint return.

The gap between single filers and married filers is somewhat significant. The American Recovery and Reinvestment Act of 2009 and earlier legislation increased the income limits for married earners from what they were originally, and more families can qualify as a result.

You can actually claim the EITC even if you don’t support any qualifying children. But as of 2019, your income is limited to less than $15,570 in this case if you’re single, filing as head of household or as a qualifying widow(er). You can earn up to $50,162 if you have three or more children, even if you’re not a married filer.

At the other end of the scale, you can earn up to $21,370 if you’re married and filing jointly but have no children, and you can earn up to $55,952 and still qualify if you’re married filing jointly and have three or more children.

You Must Have Some Earned Income

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” adjustment to income deductions at the beginning of your tax return. You can find your AGI on line 7 of the new 2018 Form 1040 tax return.

What If You Have Unearned Income?

Having unearned income in addition to earned income is OK – but again, not too much of it because there are unearned income limits as well. These are earnings such as interest from a savings account or from selling property. For purposes of qualifying for the EITC, investment income is limited to $3,600 or less as of 2019.

Other Qualifying Rules

Yes, there are still more rules:

  • You have to have a valid Social Security number as well, and it must actually be a Social Security number, not an individual taxpayer identification number
  • Your spouse must have a Social Security number if you’re married
  • These Social Security numbers must be issued before the due date for your tax return.
  • You’re prohibited from claiming the EITC if you’re married but file a separate 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.

Rules If You Don’t Have Children

Not every low-income childless taxpayer can claim the EITC. If you have no children, you must meet additional rules. Taxpayers with dependent children aren’t subject to these rules.

  • You be at least 25 years old to claim the tax credit – but you can’t be any older than age 64
  • 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 here. It doesn’t matter if that other person doesn’t claim you as a dependent. You’re disqualified from claiming the EITC even if she could have claimed you but didn't for some reason.

Between all this and the income restrictions for these taxpayers, you can see why the overwhelming majority of EITC tax refunds go to those with children.

Who Are Qualifying Children?

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, yes, your grandchild, niece or nephew counts.

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

Age Matters, Too

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

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

So How Much Is This Credit Worth?

As of 2019, the maximum credit amounts you might qualify for if all the stars align are:

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

These numbers presume that your earned income is very limited.

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.

The IRS provides detailed charts on its EITC Tax Map page, showing just how much your credit will be, based on your filing status, income and your number of qualifying children. The charts go back to as early as 2012.

The 2018 EITC If You’re Filing Late

The qualifying rules for claiming the EITC are pretty much etched in stone, but income limits and the amounts of the credit are usually adjusted annually to keep pace with inflation.

The maximum credit amount for taxpayers with three or more children was $6,431 in 2018. This dropped to $5,716 for taxpayers with two children, to $3,461 with one child, and to $519 if you have no qualifying children.

Ask the IRS to Calculate Your EITC

Yes, these calculations are complex, but the IRS will help you along. You can ask the IRS 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.

Estimate Your EITC With Online Tools

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.

Or Just Sharpen Your Pencil

The IRS provides a full list of downloadable, printable worksheets on its Tax Map if you prefer to do things the good, old-fashioned way, along with links to numerous related topics. You’ll use different worksheets depending on the nature of your earned income.

How to Claim the EITC – Schedule EIC

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 tax return at all. File, even if it's only to claim the tax credit, assuming you qualify. If you have qualifying children, you must also file Schedule EIC with your return.

This might not be as challenging as it sounds. If you earn less than $66,000 annually and you’re not self-employed, you might qualify for free help preparing and filing your return from any one of the leading tax preparation software providers. Some age limits might apply as well. These providers have teamed up with the IRS to provide Free File 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.

If You Were Denied the Credit in a Previous Year

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 an EITC claim was determined to be fraud.

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

It’s a Refundable Credit

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 two qualifying children and you’re eligible for the maximum $5,828 tax credit. You complete your tax return and realize that you had too little withheld from your paychecks all year, and now you have to pay the IRS $500. The IRS will use your EITC to erase that debt, and you’ll still have $5,328 of your tax credit remaining.

The IRS will send you a check – or make a direct deposit into your bank account – for that remaining $5,328. Yes, it’s cold, hard cash. Of course, if you opt for direct deposit, that’s yet another tax form you have to complete and submit with your return – Form 8888. The IRS has to know where to transmit the money, and this form details your bank account routing and account numbers.

You Won’t Get Your Refund Right Away

Prior to 2015, 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.

Effect of the Protecting Americans from Tax Hikes Act

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 anyway.

State-Level EITCs

This 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 29 states plus Washington, D.C., Puerto Rico and Guam have their own EITCs. 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.

References

About the Author

Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.