If you’ve ever filled taxes, at some point, you’ve probably heard of the earned income tax credit. Since this is a way to reduce your tax liability each year, many people wonder if they can claim the EITC on their next tax return.
But what is the Earned Income Tax Credit and how does the EITC work? More importantly, do you qualify for the EITC?
Thankfully, we’re here to help clear up all of your questions about the EITC. Coming up, we’ll walk you through the basics of what the EITC is and how you can file it on your next tax return. Let’s get started!
What is the Earned Income Tax Credit (EITC)?
According to the IRS, the EITC is “a benefit for working people with low to moderate income.” As a credit, the EITC is basically a dollar-for-dollar reduction of the overall amount of tax you owe.
For example, if you had an overall tax liability of $5000 and you claimed $1000 in credits, you would only owe $4000 in taxes. That’s pretty awesome.
On the other hand, deductions reduce your overall taxable income, or your AGI (adjusted gross income). So if you made $50,000 and had a deduction for $1000, your new taxable income (that’s used to figure the amount of taxes you owe) is now $49,000.
Thus, credits usually provide much more of a tax relief than a deduction does, which is why they’re so heavily sought after by hardworking people, such as yourself.
In fact, the Earned Income Tax Credit is a refundable tax credit, which means that if the EITC reduces your overall tax liability below zero, the IRS will pay you the difference, meaning you get money in your pocket come tax time. What’s not to like?
Who qualifies for the Earned Income Tax Credit?
Since everyone wants a tax credit (they’re just so awesome), there are some pretty strict rules in place to govern who can claim the earned income tax credit and how much they can use.
According to the IRS, to qualify for the earned income tax credit, you:
Must have earned income from working for someone or from running or owning a business or farm and meet basic rules. And, you must either meet additional rules for workers without a qualifying child or have a child that meets all the qualifying child rules for you.IRS, 2019
It turns out that there are more rules written about who isn’t eligible for the earned income tax credit than about those who are. Here are some things to note if you’re wondering if you’re eligible for the EITC:
- Social Security Number. Both you and your spouse, if married, and your qualifying children must have a social security number to claim the EITC.
- Married Filing Separately. Anyone filing “married filing separately” is NOT allowed to claim the earned income tax credit. It’s really unclear as to why this is, perhaps to stop two individuals filing separately from both claiming the EITC for the same children, but this isn’t explicitly stated.
- Investment Income. All of your investment income must be less than $3,600 for the year to meet the income requirements for the EITC and you must have at least $1 in earned income, which can’t come from pensions or unemployment.
- Incarceration. You can’t count any income you received while working as an inmate to claim the EITC. Ineligible work includes any services you performed, regardless of their legality, while incarcerated, in a work release program, or in a halfway house.
- Foreign Income. You can’t claim the earned income tax credit if you file Form 2555, which is for Foreign Earned Income or Form 2555-EX, the Foreign Earned Income Exclusion
- Military and People with Disabilities. There are special rules for the EITC for military members, the clergy, and people with disabilities.
What are the income limits for the Earned Income Tax Credit?
It turns out that the income limits for the earned income tax credit are all based on how you file and how many children you claim. The IRS provides us with this table for 2019:
As you can see from the table, while a single individual with no children can claim the credit if they make less than $15,270, two married people filing jointly with three or more children can have a maximum income of $54,884. Thus, the more children you have the higher the income limit for claiming the earned income tax limit.
Keep in mind, however, that the incomes listed in this table are your Adjusted Gross Income, or AGI. So, you need to figure in all of your other deductions and expenses first before you calculate your AGI.
How much is the earned income tax credit?
Similar to the income limits for claiming the earned income tax credit, there is no one single maximum credit amount for the EITC. Instead, the IRS tells us that the maximum credit for the 2019 tax year is:
- $6,557 with three or more qualifying children
- $5,828 with two qualifying children
- $2,526 with one qualifying child
- $529 with no qualifying children
If you’re unsure of whether you have a qualifying child, you can check out the IRS’ rules here.
How much can I claim for the EITC?
The earned income tax credit is purposefully designed only to really benefit working families, which is why people with more children get a much larger tax break than people with no children (upward of $6,000 more in credits – that’s a lot).
That being said, your actual EITC for the tax year is pretty tricky to calculate as your credit is equal to a percentage of your total AGI, up to the point of your maximum credit. However, the credit rate varies by your family size with a larger credit rate awarded to families with more children.
The easiest way to figure out your EITC is to check out the IRS’s EITC Assistant, which will help you determine if you qualify for the credit and for what amount.
What happens if I make a mistake with my EITC?
As you can imagine, the IRS doesn’t take kindly to people who claim more of a tax credit than they’re eligible for. In fact, if you make an error when claiming your EITC, there are some serious consequences.
If you make a mistake with your EITC, the following can happen:
- The EITC part of your refund can be delayed until the error is corrected. This can take a few months.
- Your EITC can be fully or partially denied.
- You may have to pay back the amount of EITC claimed in error, plus interest.
- You may need to file Form 8862, Information to Claim Refundable Credits After Disallowance, to claim the EITC again.
- If you intentionally or recklessly claimed the EITC with disregard for the rules, you could be banned from claiming it for the next two years.
- If you claimed the EITC fraudulently, you can be banned from claiming it for the next ten years.