Earned Income Tax Credit (EITC): Eligibility requirements, special considerations

The Earned Income Tax Credit (EITC) is a refundable tax credit for low to moderate-income individuals and families, offering a financial boost by decreasing owed taxes and possibly leading to a refund. 

This article breaks down eligibility criteria, the application process, and the direct impact of the EITC on your finances.

What is the Earned Income Tax Credit (EITC)?

The Earned Income Tax Credit (EITC), also known as the earned income credit, is a refundable tax credit designed specifically to provide financial assistance to individuals and families with low to moderate income levels through tax credits. The key requirement for claiming the EITC is that you must have earned income from employment in the year you claim the credit. This includes both domestic and foreign earned income.

Eligible individuals have the opportunity to decrease their tax liability by the equivalent credit amount. If the credit surpasses the amount of taxes owed, it leads to a tax refund for the difference. The EITC offers credit amounts ranging from $600 to $7,430, which vary based on income, filing status, and the number of children.

The EITC can yield significant benefits but necessitates adherence to certain eligibility criteria. In the following section, we’ll explore these requirements.

Eligibility criteria for the EITC

EITC eligibility depends on several factors:

• The income limits are $63,698 for married individuals filing jointly and $56,838 for individual filers, heads of household, or qualifying surviving spouses for the tax year 2023.
• Individuals must have at least $1 of earned income.
• Their investment income must not exceed $11,000.

Besides income, your filing status and whether you have a qualifying child is critical in determining EITC eligibility. We’ll investigate these factors in the subsequent subsections.

Filing status and EITC

Your filing status plays a significant role in determining your eligibility for the EITC. For instance, if you’re unmarried and bear more than fifty percent of the expenses for maintaining your primary residence where you reside with your qualifying child, you could qualify as Head of Household. On the other hand, if you’re married, you may consider the option of married filing jointly to maximize your tax benefits.

If you’re widowed with a dependent child, you might meet the requirements for the ‘Qualifying Surviving Spouse’ filing status for EITC eligibility. This would require you to have contributed more than fifty percent of the expenses for maintaining a home for yourself and the dependent child and have an adjusted gross income (AGI) below specific thresholds.

Qualifying child criteria

The criteria for a child to be considered a qualifying child for EITC include:

• Being below the age of 19
• Being below the age of 24 if they are a full-time student
• There is no upper age limit for a permanently and totally disabled child at any time during the year.

Further, the child must be the taxpayer’s:

• son
• daughter
• stepchild
• foster child
• brother
• sister
• half-brother
• half-sister
• stepbrother
• stepsister
• or a descendant of any of these (e.g., grandchild, niece, or nephew).

Additionally, the child must have resided with the taxpayer in the US for over half of the tax year.

The impact of income on EITC

The amount of EITC you can receive is directly proportional to your income level - a rise in income corresponds to a decrease in the credit amount. 

The EITC amount is determined by a specific formula, where your earned income—up to a designated level—is multiplied by a certain percentage. This computation accounts for your filing status and number of qualifying children.

Once your income crosses a certain limit—determined by your filing status and the number of qualifying children—the EITC starts to phase out. This means that the EITC will gradually diminish as your income increases until it disappears completely. This is where understanding your adjusted gross income (AGI) becomes crucial.

Understanding adjusted gross income (AGI)

Adjusted Gross Income (AGI) is a measure of income used to establish the income limits for claiming the EITC. It is calculated by deducting adjustments to income from gross income, which includes wages, dividends, and adjustments like deductions for student loan interest and self-employment taxes.

Certain types of income, such as municipal bond interest and amounts excluded by specific tax provisions like the exclusion for employer-provided health insurance, are not included in AGI. AGI is the primary factor in determining taxable income, and a greater AGI can lead to higher tax liability.

Additionally, specific deductions and credits, including the EITC, may be reduced or become ineligible for individuals with higher AGI.

Special considerations for specific tax years

In response to the COVID-19 pandemic, special tax provisions were introduced for the tax years 2020 and 2021, allowing taxpayers to utilize their 2019 earned income for their EITC calculation if it exceeded their 2020 earned income. In 2021, taxpayers can utilize either their 2019 or 2021 earned income - whichever leads to a higher credit amount.

These special provisions were introduced under the Consolidated Appropriations Act (CAA), enacted on December 27, 2020, to alleviate the economic strain on individuals impacted by the pandemic. However, these provisions are exclusive to tax years 2020 and 2021 and did not apply to preceding years such as 2018 and 2019.

Claiming the EITC: A step-by-step guide

To claim the EITC, you must file a tax return and incorporate Schedule EIC if a qualifying child is involved. But what if you were eligible for the EITC in the past but didn’t claim it? You can submit an amended return using Form 1040-X to request the EITC for the preceding three years.

To file an amended return, you’ll need to supply Form 1040-X, specify the time frame for the amended return, and support it with relevant documents such as W-2 forms or Schedule C. To receive complimentary tax support, consider visiting a Volunteer Income Tax Assistance (VITA) site, seeking help from IRS-certified volunteers through GetYourRefund.org, or filing online independently using one of the many available sites.

Beyond federal EITC: State-level credits

Beyond the federal EITC, many states offer their own versions of the credit, which can provide additional financial benefits to eligible taxpayers. Some states that offer their own versions of the EITC include:

• California
• Colorado
• Illinois
• Maine
• Maryland
• Minnesota
• New Jersey
• New Mexico

In total, 31 states plus the District of Columbia offer their own versions of the EITC.

State-level EITC credits typically align with a predetermined percentage of the federal EITC and adhere to federal EITC eligibility regulations. However, states have the autonomy to utilize distinct calculation methods, income thresholds, and unique eligibility criteria to determine the credit amount.

Although the state and federal EITC both aim to provide tax relief for low-income working individuals and families through federal income tax credits, they can vary in specific details. State credits may differ in the percentage of the federal credit they match, income thresholds, and certain eligibility criteria. As such, taxpayers should review both federal and state criteria to determine if they qualify for these credits.

Navigating common EITC issues

The process of claiming the EITC may pose certain challenges. These commonly include revising previous tax returns, dealing with delays in refunds, and managing errors. To claim the EITC for a previous year, you’ll need to amend your return by filing Form 1040-X.

To amend your tax returns, you should submit Form 1040-X, which is used to disclose alterations to your income, deductions, or credits. It’s advisable to seek assistance from a tax professional or use tax software to ensure accuracy.

Another common issue is understanding the timing of your refund. The Internal Revenue Service maintains its expectation to issue the majority of refunds to those claiming the EITC in less than 21 days. However, delays can occur due to factors such as fraud and security measures under the Path Act.

Final word

The Earned Income Tax Credit (EITC) is a beneficial tax credit designed to support low and moderate-income workers and families. Understanding the EITC, its eligibility criteria, and the impact of income on EITC amounts can help you maximize your tax benefits. By navigating common EITC issues and being aware of state-level credits, you can make the most of this credit and potentially transform your financial situation.

Frequently Asked Questions

How do I know if I qualify for earned income credit?

You must meet income and investment income limits to qualify for Earned Income Credit (EITC). Additionally, having a valid Social Security number and working with earned income below $63,398 are essential requirements.

How does the earned income tax credit work?

The earned income tax credit subsidizes low-income working families by providing a credit based on a percentage of earnings up to a maximum amount. This helps support those with lower incomes.

Who cannot claim the earned income credit?

You cannot claim the earned income credit if your AGI, earned income, or investment income is too high, you have no earned income, or your filing status is Married Filing Separately.

What qualifies as earned income?

Earned income includes taxable wages, salaries, tips, and certain disability payments received from work. It also includes union benefits and long-term disability benefits received before retirement age.

What is the Earned Income Tax Credit (EITC)?

The Earned Income Tax Credit (EITC) is a refundable tax credit that offers financial support to those with low to moderate incomes.