What Is the Earned Income Credit?
The earned income credit (EIC) is a United States tax credit that helps certain taxpayers with low incomes from work in a particular tax year. The EIC reduces the amount of tax owed on a dollar-for-dollar basis and may result in a refund to the taxpayer if the amount of the credit is greater than the amount of tax owed.
Understanding the Earned Income Credit
The earned income credit, also known as the earned income tax credit (EITC) was introduced to keep families out of poverty while encouraging everyone to work, whether single or married. The EIC is only available to low-income earners and some middle-income families. Households that qualify for the EIC can reduce their tax liability to zero, in which case they will owe no income taxes. In a case where the income tax owed is reduced to an amount below zero, the government will issue a tax refund for the difference.
How Tax Credits Work
A tax credit reduces the value of a taxpayer’s liability, dollar for dollar. For example, an individual with a tax bill of $2,900 and who can claim a $529 credit, will reduce his taxes to $2,900 – $529 = $2,371. This is the amount that he pays to the Internal Revenue Service (IRS). In addition to the benefit of reducing the tax owed, a tax credit may also entitle the taxpayer to a refund, depending on how much credit s/he qualifies for. There are different types of tax credits available to taxpayers, and one of the most important ones is the EIC.
The amount of credit that any one individual can claim depends on the annual income earned for the tax year and the number of qualified dependents that the taxpayer has. A qualified dependent, according to the IRS, is a child that is related to the taxpayer either by birth, adoption, or fostering. The child can also be a sibling or the child of a sibling such as a niece or a nephew. A qualified dependent should be younger than 19 or younger than 24 if a full-time student. In both instances, the taxpayer must be older than the child, except in the case where the dependent is permanently disabled.
Qualifying for Earned Income Credit
To qualify for the EIC, a taxpayer’s earned income and adjusted gross income (AGI) must be less than certain income limits. For the 2019 tax year, the maximum amount of EIC that could be claimed by a single or married taxpayer depending on the number of children in the household is shown in the table below:
|2019 EIC Income Limits|
|Number of Children||Single or Head of Household||Married Filing Jointly||Maximum Amount of Credit|
From the table above, a single filer with no dependents earning less than $15,570 is eligible for up to $529 in earned income credit. On the other hand, a taxpayer with two children and filing jointly with her spouse can claim up to a maximum of $5,828 in EIC if the total of the couple’s earned income in 2019 falls below $52,952. A spouse who is filing separately would not qualify for earned income credit.
In addition to the child qualification guidelines and income limits required to qualify a household for the EIC, a series of other eligibility requirements must be met. To be eligible, the taxpayer—must be between the ages of 25 and 65 and live in the U.S. for more than half of the tax year if s/he does not have a qualifying dependent; cannot be a qualifying child for another person; must have a job or be self-employed to earn qualifying income; must be a U.S. citizen or resident alien for the entire tax year; etc.
Congressional Research Service. "The Earned Income Tax Credit (EITC): A Brief Legislative History," Pages 5–7. Accessed Dec. 7, 2019.
Internal Revenue Service. "Qualifying for the Earned Income Tax Credit." Accessed Nov. 13, 2019.
Internal Revenue Service. "Credits and Deductions for Individuals." Accessed Dec. 7, 2019.
Internal Revenue Service. "Qualifying Child Rules." Accessed Dec. 7, 2019.
Internal Revenue Service. "2019 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates." Accessed Dec. 7, 2019.
Internal Revenue Service. "EITC, Earned Income Tax Credit, Questions and Answers." Accessed Dec. 7, 2019.