Earned Income Tax Credit (EITC): Definition and How to Qualify

What Is the Earned Income Tax Credit (EITC)?

The earned income tax credit (EITC) is a refundable tax credit that helps certain U.S. taxpayers with low earnings by reducing the amount of tax owed on a dollar-for-dollar basis. Taxpayers may be eligible for refunds if their tax credit exceeds their tax liability for the year.

Legislation enacted in 2020 recognized that many taxpayers’ incomes that year were lower than their incomes in 2019 due to the COVID-19 economic crisis and lockdown; this law allows taxpayers to base the EITC claimed on their 2020 tax returns on either their 2019 or 2020 earnings.

For 2021 tax returns, the law liberalizes some EITC rules and makes an increased EITC available to more childless taxpayers.

Understanding the Earned Income Tax Credit (EITC)

The earned income tax credit (EITC), also called the earned income credit (EIC), was conceived as a “work bonus plan” to supplement the wages of low-income workers and help offset the effect of Social Security taxes. It continues to be viewed as an anti-poverty tax benefit.

The EITC is available only to taxpayers with low or moderate earnings, whether or not they have qualifying dependents. To claim the credit for 2022, an individual taxpayer (or if the taxpayer is married, the individual or their spouse, filing jointly) with no qualifying dependents must be at least 19 years old and must live in the United States for more than half of the tax year. 

The credit percentage, earnings cap, and credit amount vary according to a taxpayer’s filing status and number of dependents. Qualifying dependents, which can include dependent children who are under age 19, students under age 24, or dependents with a disability. These factors also determine the income phaseout range over which the credit diminishes to zero. No credit is allowed above the ceiling for the phaseout range.

To be eligible for the EITC, a taxpayer must have earnings but cannot have investment income in excess of a specified level. For 2022, the maximum level of investment income was set at $10,300, increasing to $11,000 in 2023. Age, relationship, and residency requirements also apply with respect to qualifying dependents.

The credit reduces the amount of tax owed on a dollar-for-dollar basis. If the amount of the EITC is greater than the amount of tax owed by a taxpayer, then the taxpayer may be eligible for a refund.

The EITC is one of the most important tax credits available to individual taxpayers. The taxpayer must be a U.S. citizen or a resident alien for the entire year and have a valid Social Security number by the tax return’s due date. The amount of credit that can be claimed on a tax return depends on the taxpayer’s annual earned income for the tax year, filing status, and number of qualified dependents.

Example of the EITC

A refundable tax credit reduces the value of a taxpayer’s liability, dollar for dollar, and results in a refund if the liability is reduced below zero. For example, an individual who has a tax bill of $2,900 and can claim a $529 credit will owe $2,371 ($2,900 - $529 = $2,371).

That lower amount is the total that the taxpayer must pay to the Internal Revenue Service (IRS) for the year. If a taxpayer has a total tax liability of $1,000 and a credit of $1,500, then the taxpayer should be entitled to a refund of $500. 

Qualifying for the EITC

To qualify for the EITC, a taxpayer’s earned income and adjusted gross income (AGI) must be below certain income limits. The limits on the income level, credit amount, and investment income for a single or married taxpayer vary, depending on the number of qualifying dependents in the household.

For the 2022 tax year, those limits were as follows. Note that in order to receive the credit, you must have earned less than $10,300 from investments.

These limits are changed for tax year 2023, as shown below. In addition, the threshold for investment income also increased to $11,000.

*Taxpayers who claim the EITC under married filing separately must meet the eligibility requirements under the special rule in the American Rescue Plan Act (ARPA) of 2021.

As shown in the table above, a single filer with no dependents who earned less than $16,480 in 2022 is eligible for an EITC of up to $560, depending on AGI. On the other hand, a married taxpayer and spouse filing jointly, having two children who are qualifying dependents, can claim up to a maximum EITC of $6,164 if the total of the couple’s earned income in 2022 was less than $55,529.

Taxpayers who are married filing separately can qualify for this credit provided that they meet the eligibility requirements under the ARPA. The tax law provides special EITC rules for clergy and members of the military stationed abroad, and specific rules coordinating the credit with the tax laws applicable in Puerto Rico, Guam, and American Samoa.