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What is the Earned Income Tax Credit and How Do I Use It?

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What is the Earned Income Tax Credit and How Do I Use It?

Question-And-Answer

Nick M.-

The Earned Income Tax Credit (EITC) started in the 1970s as a way to reduce the tax burden on low and middle-income workers and families.

Learn how the EITC works, what income levels qualify, how dependents qualify, and what to do if you claim the credit.

How Does the EITC Work?

The Earned Income Tax Credit is a refundable tax credit on your tax return. Refundable credits pay you the difference if the credit more than pays for your due taxes. By contrast, non-refundable credits can reduce your tax bill to $0, but they will not refund you any surplus credit.

Depending on your income and number of dependents, you could qualify for a credit between $2 and $6,557. Once your income level reaches the maximum threshold, the credit phases out.

Related: What is the Difference Between a Tax Credit and Tax Deduction?

Maximum Credit Amounts

For the 2020 tax year, the maximum credit amounts are:

  • 3 or more qualifying children: $6,660
  • 2 qualifying children: $5,920
  • 1 qualifying child: $3,584
  • No qualifying children: $538

Earned income tax credit

Are You Eligible for the EITC?

The IRS provides an interactive tool you can use to find out if you qualify for the EITC, and for how much.

You are eligible for the EITC if you meet all of the following:

  • Have a social security number valid for employment
  • Use a filing status of single, head of household, widow(er) or married filing jointly
  • Be a US citizen or permanent resident all year
  • Not claim a foreign earned income credit
  • Your earned income and adjusted gross income (AGI) is less than a specific limit, but more than $0
  • Earned less than $3,600 in investment income
  • Must not be the dependent or qualifying child of another filer
  • Between the ages of 25 and 64 (or spouse if filing jointly)
  • Your main home is in the US for more than half of the year

However, there are a few special rules for military and clergy members. Also, disability income may qualify as earned income.

Typically, earned income refers to your salary, hourly wages, tips, side gig income, and other taxable pay you receive from an employer. Adjusted gross income is earned income after deductions.

Are Your Dependents Eligible for the EITC?

You can receive a significantly larger Earned Income Tax Credit if you have one or more dependents.

The IRS makes it a bit trickier to determine if your dependents qualify you for the EITC.

  • Child must have a social security number valid for employment
  • No one else can claim the child as a dependent
  • Child must live with you for more than half of the year
  • Child must be younger than you
  • Child must be under 19 years of age (or 24 if a full-time student)
  • Child can be any age if he or she qualifies as “permanently and totally disabled”
  • Child must not file a joint return
  • Child must be your natural or adopted child, step or foster child, your full/half/step-sibling, or a descendant of any of them

Related: Does My Child Or Relative Qualify As A Dependent For Tax Purposes?

If you qualify for the EITC, you may also qualify for the Child Tax Credit.

Income Limits

These are the income limits to qualify for the EITC for the tax year 2020.

If single, head of household or widowed:

  • 3 or more qualifying children: $50,954
  • 2 qualifying children: $47,440
  • 1 qualifying child: $41,756
  • No qualifying children: $15,820

If married filing jointly:

  • 3 or more qualifying children: $56,844
  • 2 qualifying children: $53,330
  • 1 qualifying child: $47,646
  • No qualifying children: $21,710

Filing for the EITC

It’s important that prepare your taxes correctly when filing for the Earned Income Tax Credit. EITC errors can slow down processing or cause the IRS to deny your request.

If the IRS declines your EITC claim, you may have to pay back some or all of the tax credit. They may require that you file additional paperwork. Additionally, they could ban you from claiming the EITC for two to ten years.

If you need help understanding the EITC, you can contact the IRS hotline at 800-829-1040. The agents are very helpful and can provide you with sound advice. Alternatively, you can reach out to a CPA or Enrolled Agent in your area.

It is better to seek help earlier in the year than later. The IRS hotline is very busy Mid-March through April, so you might have to wait on hold a while to reach a person.

Track Your Refund

If you already filed your taxes, you can check on the status of your refund.

The IRS has a simple online system that’s simple and secure. Just enter a few pieces of personal information. It will tell you if the IRS received your refund, if they’re processing it, or if they’ve accepted it and issued a refund.

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