The Earned Income Tax Credit (EITC) is available to working taxpayers with low to moderate income. They must also meet specific requirements and file a tax return (even if not required to otherwise). The EITC is a refundable credit, which means that if it reduces your tax liability to zero, any excess can be refunded.
Basic Earned Income Tax Credit Requirements for All Taxpayers
To qualify for the earned income tax credit, all taxpayers must first meet the following requirements:
- Taxpayer(s) (and any qualifying children) must have social security numbers (SSN) valid for employment by the due date of their tax return (including extensions). If a child does not have a valid SSN by such date, they cannot be claimed as a qualifying child for purposes of computing the credit.
- Your filing status cannot be married filing separately (MFS). So if you are married, you must file as married filing jointly (MFJ).
- You must be a U.S. citizen or resident alien all year. If you are married and your spouse is a nonresident alien for any part of the year, you must file MFJ and elect to treat the nonresident alien spouse as a U.S. resident (taxed on worldwide income) in order to be eligible to qualify for the EITC.
- You cannot file form 2555. This form relates to foreign earned income.
- Investment income cannot be greater than $3,450 (2017 tax year). Such income includes interest (including tax exempt interest), dividends, capital gains, and royalties. It also includes rental income from personal property, and income from rental real estate and other passive activities.
- You cannot be a qualifying child (see below) of another person.
- You must have total earned income of at least $1. This includes wages, salaries, tips, and other employee income. Net self-employment (SE) income (including consulting income) also qualifies. Notice, however, the use of the word “net” for SE income. You may have a business which generates $10,000 in taxable revenue. But if your related deductible expenses are $11,000, you do not have earned income from this business.
- You must meet an earned income and adjusted gross income (AGI) threshold (see below).
Do You Have a Qualifying Child?
In order to apply the earned income and adjusted gross income (AGI) limitations, you must determine if you have a qualifying child.
To have a qualifying child, the following requirements must be met:
The Child Must Meet the Relationship, Age, Residency, and Joint Return Tests
The child must meet the relationship, age, residency, and joint return tests. Note that the support test is not a factor for earned income tax credit purposes.
A qualifying child may be your son, daughter, stepchild, legal foster or adopted child, sibling, half sibling, and any of their descendants.
The qualifying child must be under age 19 at year end and younger than you (or your spouse if MFJ). Alternatively, the child may be under age 24 if a student, but must still be younger than you (or spouse if MFJ).
To qualify as a student, the child must attend (on a full-time basis) a school for some part of any five calendar months during the calendar year. The school must have a regular teaching staff and course of study. It must also have a regularly enrolled student body where its educational activities take place.
If permanently and totally disabled at any time during the year, the qualifying child can be any age.
The child must have lived with you for more than half the year. Death or birth of a child during the year is considered to meet this test if they lived with you for more than half the time they were alive during the year. Your child is considered to be living with you during temporary absences such as those due to illness, vacation, and education.
Joint return test
The child cannot file a joint tax return for the year unless it is only filed for the purpose of claiming a refund of estimated taxes paid or withheld. Also, if the child was married at year end, you must claim an exemption for the child unless you gave the right to claim the exemption to the child’s other parent. Otherwise, the joint return test will not be met.
The Child Cannot Be Used By More Than One Person to Claim the EITC
The qualifying child cannot be used by more than one person to claim the earned income tax credit. If you cannot claim a child due to the tiebreaker rules, you can use another child to claim the EITC, but you cannot use the rules for taxpayers without a qualifying child to claim the credit.
If You Do Not Have a Qualifying Child…
When you do not have a qualifying child, you must also meet the following requirements:
- You (or your spouse if MFJ) must be at least age 25 but under age 65 as of the end of the year. If you turn 25 on Jan 1st, you’re considered to be 25 as of Dec 31st of the prior year. If you turn 65 on Jan 1st, you’re still considered 64 as of December 31st of the prior year.
- Neither you (nor your spouse if MFJ) may be the dependent of another person.
- Both you and your spouse (if MFJ) must have lived in the U.S. more than half the year.
Adjusted Gross Income (AGI) Test
Finally, to qualify for the credit (in 2017), your earned income and AGI must be less than:
- $48,340 ($53,930 if MFJ) if you have 3 or more qualifying children – Maximum credit is $6,318.
- $45,007 ($50,597 if MFJ) if you have 2 qualifying children – Maximum credit is $5,616
- $39,617 ($45,207 if MFJ) if you have 1 qualifying child – Maximum credit is $3,400
- $15,010 ($20,600 if MFJ) if you do not have a qualifying child – Maximum credit is $510
You May Have To Provide Documents to Prove You Are Eligible
The IRS may request documents such as birth certificates and school records to confirm that you are eligible for the EITC. Such a request will typically delay any refund.
What if Your Earned Income Tax Credit is Reduced or Disallowed?
If your claim for the EITC is reduced or disallowed for any reason other than a math or clerical error for a year after 1996 you may have to file IRS form 8862 to claim the credit in a subsequent year. In such a case, file this form to claim the credit only if you meet all the requirements otherwise.
If you claim the credit by filing form 8862 and your credit is not disallowed or reduced, you do not have to file the form in subsequent years. You also do not need to file form 8862 if your EITC was reduced or disallowed in a prior year due to an IRS determination that a qualifying child that you claimed was not your qualifying child. This exception only applies if you are claiming the EITC without a qualifying child for the current year.
If it is determined by the IRS that your EITC claim was due to reckless or intentional disregard for the EITC rules, you cannot claim the credit for 2 years. Further, if it is determined that your EITC claim was fraudulent, you cannot claim the credit for 10 years.
Earned Income Credit At the State Level
Many states also offer an earned income tax credit as well. It is generally based on the federal EITC. For a listing of states which offer this credit, click here.
As is the case with many other tax credits and deductions, it is possible to miss the EITC if you are not aware of it. This can happen whether you use tax software or prepare your tax return by hand. Some basic knowledge about the credit as well as how you qualify can help you reduce your tax bill and maybe even get a refund.
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