The Earned Income Tax Credit (EITC) is designed to assist people with limited incomes by reducing the amount of federal income tax they owe. Even those who don’t earn enough money to owe federal income taxes may be eligible for an EITC.
The credit can be claimed when filing your annual federal tax return or, in some cases, in increments throughout the year via the Advanced Earned Income Tax Credit (AEITC). For tax year 2009 (filing by April 2010), the EITC ranges from $438 to $4,824, depending on your adjusted gross income and the number of qualifying children in your family. There is no limit to the number of times you can claim an EITC; you can claim one every year that you are eligible.
EITC Benefit for Tax Year 2009
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No Children
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One Qualifying Child
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Two or More Qualifying Children
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Single
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Adjusted gross income of less than $12,880
Maximum Tax Credit $438
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Adjusted gross income of less than $33,995
Maximum Tax Credit $2,917
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Adjusted gross income of less than $38,646
Maximum Tax Credit $4,824
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Married (filing jointly)
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Adjusted gross income of less than $15,880
Maximum Tax Credit $438
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Adjusted gross income of less than $36,995
Maximum Tax Credit $2,917
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Adjusted gross income of less than $41,646
Maximum Tax Credit $4,824
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The EITC program was established in 1975 and is administered by the Internal Revenue Service (IRS). Savings to those who qualify can be significant. Approximately 22.7 million families claimed Earned Income Tax Credits totaling $42.6 billion in tax year 2005.
Example:
Roberto is single and has one child. Based on his income, he qualifies for a $2,917 Earned Income Tax Credit. Without the EITC, he would owe $2,000 on his federal income taxes. With the tax credit, he receives a refund of $853 from the IRS.
Program Eligibility
To be eligible for the Earned Income Tax Credit you must meet several criteria:
- You must meet adjusted gross income requirements (see table above).
- You must have earned income from employment, self-employment or employer-paid disability benefits received prior to retirement.
- You must have a Social Security Number valid for employment.
- You cannot file your taxes as “married filing separately.” If you’re married, you must file a joint tax return.
- You must be a U.S. citizen or legal resident. If you’re a nonresident alien, you must be married to a U.S. citizen or legal resident and filing a joint tax return.
- You must live in the U.S. for more than half of the year.
Age Requirements:
- If you are claiming qualifying children, you can be any age.
- If you’re not claiming a qualifying child, you must be 25-64 years of age.
Additional requirements:
- You cannot claim foreign income or a foreign housing deduction using Form 2555
or 2555EZ.
- You must not have investment income that exceeds $2,900 (for tax year 2009).
- You cannot be the dependent of another person.
- You cannot be the qualifying child of another person.
More on Earned Income
To qualify for an EITC, you must receive earned income. This can include your wages, salaries, tips, net earnings from self-employment, or any other form of taxable pay. You can also elect to include nontaxable combat pay as earned income.
Employer-paid disability payments received prior to retirement are considered earned income under the EITC program. But benefit payments received from a policy you paid the premiums for, or that you received post-retirement, would not be considered earned income.
Other items that do not qualify as earned income under the EITC include:
- interest and dividends
- Social Security and railroad retirement benefits
- pensions and annuities
- alimony and child support
- workers’ compensation benefits
- unemployment compensation
- welfare benefits
- veterans’ benefits
If you are married and filing jointly, at least one spouse must receive earned income to be eligible for an EITC.
Adjusted Gross Income
In addition to the earned income requirement, you must have an adjusted gross income (AGI) below certain levels to qualify for an EITC.
Your adjusted gross income (AGI) includes all earned income before deductions for taxes, health care or other expenses, minus certain business, education-related, and other expenses. While filling out your annual tax return (IRS Forms 1040, 1040A, or 1040EZ), you will be asked a series of questions that will allow you to determine what your AGI is.
Example:
John earned $30,000 in wages for the year before taxes and other deductions were taken out of his paychecks. He also earned $4,000 in employer-paid disability insurance payments for the year. He had no deductions for business, education-related or other expenses. According to the EITC program, John’s adjusted gross income would be $34,000—his gross wages plus payments received from the employer-paid disability insurance.
Adjusted Gross Income and Qualifying Children
For a child to be considered a qualifying child under EITC, several requirements must be met:
- Relationship: The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendent of any of these (e.g. – your grandchild, niece, or nephew)
- Residence: The child must live at the same residence as the taxpayer for more than half the year and have a valid Social Security number.
- Age: At the end of the tax year, the child must be under 19. Or, if attending school full-time, the child must be under 24. The only exception is for individuals who are permanently and totally disabled. If the taxpayer’s child is permanently and totally disabled, there is no age requirement.
According to the IRS, a person is considered “permanently and totally disabled” if their condition is expected to last continuously for at least one year or is expected to result in death, and if they cannot perform any Substantial Gainful Activity (SGA). For tax year 2009, this means they cannot work and earn more than $900 per month.
Note: Qualifying children can only be used by one family member to claim an EITC.
If you don’t have any qualifying children, the maximum adjusted gross income you can have and still qualify for an EITC is $12,880 ($15,880 for a couple).
With one qualifying child, your AGI can be up to $33,995 ($36,995 for a couple). With two or more qualifying children, you can have an AGI of up to $38,646 ($41,646 for a couple).
How do I receive an EITC?
If you qualify, you will claim your Earned Income Tax Credit while filing your federal tax return. If you don’t have any qualifying children, you can use IRS Form 1040, 1040A, or 1040EZ. If you have a qualifying child, use Form 1040 or 1040A and be sure to attach a Schedule EIC.
To calculate the value of your EITC, you can use the Earned Income Credit Worksheet in your 1040, 1040A, or 1040EZ instruction booklet. Or you can ask the IRS to calculate it for you by noting an “EIC” on the Earned Income Credit line on your tax return.
For an estimate of the value of your EITC, use the Center on Budget and Policy Priorities Tax Credit Estimator. You can use the IRS EITC Assistant to help determine whether or not you are eligible for an EITC.
Advanced Earned Income Tax Credit
Rather than claiming your tax credit all at once, you may be able to receive a portion of the expected EITC payments throughout the year via an Advanced Earned Income Tax Credit (AEITC). If you qualify, EITC payments will be deposited directly into your paychecks throughout the year and you can claim the remainder when you file your taxes.
In addition to meeting all EITC requirements, you must have at least one qualifying child to qualify for an Advanced EITC, and you must file an Earned Income Advance Credit Payment Certificate (IRS Form W-5) with your employer.
Some Tips on Claiming an EITC and Tax Preparation
Keep all your W-2's and maintain a record of who you have worked for during the year. This will make things simpler when it comes time to file your taxes.
If you are on a limited income, do not pay someone to do your taxes. Use a Volunteer Income Tax Assistance (VITA) Center to file. Most centers can e-file your return for free. If you are self-employed, have all your receipts and a log of expenses ready for the tax preparer.
Be sure to file your taxes, even if your income is lower than what is required by law. You might be eligible for an EITC or some other tax credit. Many families with children who qualify for an EITC may also be eligible for a Child Tax Credit (CTC).
The following is a synopsis of the EITC requirements:
Earned Income Credit Requirements for Tax Year 2009
Requirements
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Individuals without Qualifying Child
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Individuals with at least one Qualifying Child
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Adjusted Gross Income
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$12,880 for a single individual.
$15,880 for married couple.
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One qualifying child:
$33,995 for single individual.
$36,995 for married couple.
More than one qualifying child:
$38,646 for single individual.
$41,646 for married couple.
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Social Security Number
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Social Security Number valid for employment.
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Social Security Number valid for employment.
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Tax Status
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Joint tax return if married, unless separated for more than six months.
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Joint tax return if married, unless separated for more than six months.
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Citizenship
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Must be a U.S. citizen or legal resident. Or if you’re a nonresident alien, you must be married to a U.S. citizen or legal resident and filing a joint tax return.
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Must be a U.S. citizen or legal resident. Or if you’re a nonresident alien, you must be married to a U.S. citizen or legal resident and filing a joint tax return.
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Foreign Income
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Cannot claim foreign income or a foreign housing deduction using Form 2555 or Form 2555-EZ.
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Cannot claim foreign income or a foreign housing deduction using Form 2555 or Form 2555-EZ.
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Investment Income
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Cannot have investment income that exceeds $2,900.
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Cannot have investment income that exceeds $2,900.
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Earned Income
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Must have earned income.
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Must have earned income.
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Relationship
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Does not apply.
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The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendent of any of these (e.g. – grandchild, niece, or nephew).
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Age
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Adult:
Must be at least 25 years old at the end of the tax year; and
Must be under age 65 at the end of the tax year.
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Adult:
No age requirements.
Children:
Under age 19 at end of the year;
Under age 24 at the end of the year and a full-time student; or
Any age if permanently and totally disabled.
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Residency
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Must live in the U.S. for more than half of the year.
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Must live in the U.S. for more than half of the year.
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Qualifying Child
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Cannot be the qualifying child of another person.
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Must have at least one qualifying child.
Each qualifying child can only be used by one family member.
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Dependent Child
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Cannot be the dependent of another person.
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Cannot be the dependent of another person.
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Tax Forms
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1040;
1040A; or
1040EZ.
To have IRS figure the amount of your credit, enter “EIC” on the Earned Income Credit line of your tax form.
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1040 or 1040A
AND
Schedule EIC.
To have IRS figure the amount of your credit, enter “EIC” on the Earned Income Credit line of your tax form.
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Interaction with other disability benefits programs
Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI)
You must receive some form of earned income to qualify for an EITC. Social Security benefits do not count as earned income under the program. You can, however, be on SSI or SSDI and claim an EITC, as long as you have some other form of earned income.
Long Term Disability Insurance
Employer-paid long-term disability insurance benefits received prior to retirement count as earned income under EITC and can therefore be used to qualify for the program. Disability insurance benefits for which you pay the premiums, or that you receive post-retirement, are not considered earned income and cannot be used to qualify for an EITC.
Individual Development Accounts (IDAs)
Money received from an EITC can be deposited into an Individual Development Account and matched.
Plans for Achieving Self-Support (PASS)
Money received from an EITC can be set aside in a PASS.
Sources
If you are eligible for an EITC, you can receive free tax preparation assistance through Volunteer Income Tax Assistance (VITA) sites. The Franchise Tax Board has a VITA site search to help you find a site in your area.
IRS Publication 596 is a comprehensive guide to the EITC. It includes information on program rules, calculating and claiming an EITC, Advanced Payment of EITC, rules regarding qualifying children, and sample worksheets.
The National League of Cities provides an EITC Toolkit that includes comprehensive information on the EITC program.
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