OVERVIEW
The earned income tax credit, or EITC, is available to taxpayers with low to moderate income. It was created in 1975 to help offset the heavy burden of Social Security taxes and act as an incentive for low-income taxpayers to continue working.
About the EITC
The EITC is a refundable tax credit, which means that it can be used to reduce your taxable income below zero and generate a tax refund. The maximum amount of EITC allowed and income limitations associated with claiming it are adjusted each year by the IRS based on the cost of living. You must meet certain requirements in order to claim the credit. If you have a qualifying child or children, you claim the EITC by filing Schedule EIC with your tax return.
Determining eligibility
You must meet the following requirements in order to be eligible for the EITC:
- Have a valid Social Security number.
- Be a U.S. citizen or a full-year resident alien.
- Have earned income (wages, salaries, self-employment income, etc.) and meet the EITC income limits.
You cannot claim the credit if you are married and filing a separate return, file Form 2555 or 2555-EZ, have more than $10,300 of investment income (2022 amount), or if you can be the qualifying child of another person. For most years, you can claim the EITC without having a qualifying child and filing Schedule EIC if you are not claimed as a dependent on another person's return, you live in the U.S. for more than half the year and are at least age 25 and under 65 at the end of the year. However, for 2021, you can claim the credit as a single person as young as age 19 and there is not any upper age limit. Also for 2021, a specified student can claim the credit starting at age 24 and qualifying former foster youths and qualified homeless youths can claim the credit at age 18.
Qualifying children
You use Schedule EIC to claim the EITC with one or more qualifying children (maximum of three). To qualify, a child must meet the tests for residency, age, joint returns and relationship. These include:
- Have lived with you for more than half the year
- Be under age 19 at the end of the tax year—or 24 if a full-time student—and not have filed a joint return
- Be your son, daughter, brother, sister, stepbrother, stepsister or a foster child legally placed under your custody.
Only one person can claim a qualifying child. If a child can be the qualifying child for more than one person, the IRS has a tie breaker to determine who claims the child.
Calculating the credit
There are two ways to calculate the amount of your EITC. First, you can calculate the credit yourself using the earned income credit worksheet and earned income credit table found in the 1040 Instruction Booklet. When filing Schedule EIC and claiming the credit with a qualifying child or children, it is very important that you find your credit amount in the appropriate column for your filing status and number of qualifying children on the earned income credit table. Second, you can choose to have the IRS figure your credit amount for you if you do not wish to calculate the credit yourself. You can do this by entering "EIC" on line 64a of Form 1040.
The amount of EITC you qualify for increases with the number of qualifying children (up to three), is available with earned income of up to $59,187, and can result in a credit of up to $6,935 for three children (lesser amounts for one or two children; all amounts are for 2022).
The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC). For 2021, you can use whichever year's earned income, 2019 or 2021, that gives you the highest credit.
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