What is the Earned Income Tax Credit?

Filing taxes can either be very simple or overly complex.

There are so many exclusions, credits, loopholes, and deductions to know about that it can be easy to miss out on credits that you qualify for simply because the tax system is so complex.  One of those tax credits worth knowing about, especially if you are in a low income bracket, is the EITC or Earned Income Tax Credit.

What is the Earned Income Tax Credit?

Tax credits are great because they are a direct reduction in the amount of tax that you owe.  Tax deductions are good, too, but they simply reduce your income that will then be taxed.

A tax credit like the EITC is much more valuable.  It’s important to find out if you qualify for the EITC, especially if you know that you don’t have significant investment returns or income for the tax year.

The Earned Income Tax Credit is meant for people who are working and have low to moderate income.  The credit is designed to provide incentive to keep working rather than relying on government subsidies.  Part of the goal of the EITC is to offset social security taxes that you pay as you earn an income.  As with many government tax credits and deductions there is some controversy around the support the Earned Income Tax Credit provides for individuals or couples with children.

Earned Income Tax Credit Qualifying Factors

Not everyone will qualify for the EITC even if you do have several dependents and don’t make a large income.  This is because in order to qualify for the EITC, you have to meet several qualifying factors.

2012 EITC Income Limits

Each year the government updates what the maximum income you can have to qualify for the EITC. That number is also influenced by the number of qualifying children living with you.

  • $45,060 ($50,270 married filing jointly) with three or more qualifying children
  • $41,952 ($47,162 married filing jointly) with two qualifying children
  • $36,920 ($42,130 married filing jointly) with one qualifying child
  • $13,980 ($19,190 married filing jointly) with no qualifying children

Obviously, the biggest qualifying factor is your income.

For example, if you do not have children, you have to make less than $13,980 annually or ($19,190 if you are married filing jointly) to earn the credit.  If you make above these limits the EITC will not apply to you.  However, there are some other factors to be aware of.

Qualifying for EITC Without Children

CreditEven though EITC is often thought of as a tax credit for families with children, those without children can qualify as well as long as their income is below the no qualifying children limit.

Additionally, you must:

  • not use married filing separately tax filing status
  • your investment income must be below $3,200 for the tax year
  • live within the United States for more than half of the year
  • both you and your spouse must be over age 25 but under age 65
  • neither you or your spouse can be claimed as a dependent on another person’s taxes

Qualifying for EITC With Children

All of the above rules apply to families with children.  However, you must have qualifying children for the EITC to apply to you.


Here are the guidelines on qualifying children:

  • they must be your child (meaning by birth, through adoption, a stepchild through marriage, a foster child, or a descendant such as a grandchild) or directly related to you (such as a brother, sister, half-brother, half-sister, or any descendant of these such as a niece or nephew)
  • at the end of the year the child was younger than 19 (or, if a full-time student, 24) or fully disabled (at any age)
  • the child must live with you for more than half the year

Related: Start your tax Return Online with Turbo Tax- Review

Earned Income Tax Credit Maximum Credit

For the 2012 Tax Year the EITC maximum credit is:

  • $5,891 with three or more qualifying children
  • $5,236 with two qualifying children
  • $3,169 with one qualifying child
  • $475 with no qualifying children

Final Thoughts on the Earned Income Tax Credit

Ultimately, what’s important is that you educate yourself not only about the EITC but other credits as well to ensure that you are keeping as much of your income as possible.

Also, talk to a tax professional if you need help determining your eligibility for this credit.  It’s better to ask for help than to miss out on what is essentially free money.

If you are close to qualifying for the Earned Income Tax Credit, but earn a little bit too much income leading up to the end of the year, you might want to get creative with finding ways to get additional deductions (within legal limits of course).

Those deductions could get your income back into range to qualify for the EITC and end up saving you a ton of money with the tax credits.

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Published or updated April 15, 2013.

Comments

  1. Interesting article Kevin.

    I do think that the government makes these credit systems unduly complicated though. Sometimes it feels like they make them confusing precisely so that no-one can actually figure out how to claim them!

  2. The one thing that bothers me about these types of programs is that people will just continue to have kids to get them, or get more benefits. Maybe these programs would be more beneficial if we pay people with low incomes to only have 1-2 kids. Because even on their low income they should be able to support those kids. I know accidents/surprises happen but there are ways to reduce the odds of that and people are not willing to do it.

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