What Is the Earned Income Tax Credit?

Christine Hudson

The earned income tax credit, also commonly referred to simply as the EITC, is a United States tax code provision that allows certain individuals to claim an often significant credit against the income tax levied at the federal level. It works a lot like a deduction in that it usually has to be specifically claimed, but rather than taking a cut off the top of owed taxes the way a deduction would it lowers the taxable base to begin with. In most cases it’s only available to workers classified as “low wage,” though the exact earnings that will qualify typically shift from year to year. The main idea is to alleviate the tax burden on those who are earnestly working, just not earning much. Unlike other related credits, workers don’t typically need to claim dependents in order to qualify. The more dependents that are claimed, though, the greater the credit tends to be. Calculation usually involves a bit of effort as well as a close reading of the most current tax code, and taxpayers must usually specifically elect into the credit at the time they file their returns in order to reap the benefits.

Erroneously claiming the Earned Income Tax Credit may result in being audited by the IRS.
Erroneously claiming the Earned Income Tax Credit may result in being audited by the IRS.

Main Reasoning Behind the Credit

U.S. lawmakers created the EITC in 1975 as a means of protecting workers in low-paying jobs from taxes that might be too burdensome. The main fear was that the income taxes levied at by the federal government would be so steep when balanced against an already low wage that they would disincentivize the work entirely, prompting people to forgo employment in favor of welfare or other state benefits.

The Earned Income Tax Credit is recorded on a line of a person's 1040 Form.
The Earned Income Tax Credit is recorded on a line of a person's 1040 Form.

The credit works by reducing the overall tax burden, and issuing a “credit” against taxes paid. Most of the time this simply eliminates or significantly reduces the taxes owed, but in some cases can also trigger a refund. The EITC operates on a schedule of phase-ins, phase-outs, and variable plateaus that fluctuate with things like spousal income, earnings from investments, and number of dependent children claimed. Participants usually have to file separate worksheets identifying all of their assets to qualify, mainly as a precaution against abuse and fraudulent claims.

Eligibility Requirements

Only certain people are eligible for this credit. United States citizens, resident aliens who have been living as such for the entire tax year, or nonresident aliens married to a citizen and filing jointly can typically claim the Earned Income Tax Credit. Applicants need a valid social security number and of course must have earned income, either through employment or being self-employed, during the tax year. Income from investments or other passive vehicles doesn’t usually qualify. With very few exceptions, the money must be earned through some sort of labor.

Effect of Claimed Dependents

A taxpayer does not need to have a qualifying dependent to receive the EITC. Dependents do increase the possible EITC amount, however. In general, those without qualifying children must be between the ages of 25 and 65, must not be listed as another taxpayer's dependent, and must have lived in the U.S. for more than six consecutive months at the time of filing.

A qualifying child is one who lives with the taxpayer for over half the year and is under the age of 19 at the end of the tax year. Permanently disabled children or full-time students under the age of 24 who live at home are also considered qualifying children. Legally adopted or foster children, stepchildren, or any other child depending on the taxpayer's income are also eligible. Those who are not sure their dependent will qualify are usually advised to contact the Internal Revenue Service, either on the phone or through the agency’s website, before filing.

Calculation Basics

To claim the Earned Income Tax Credit, an individual can use the Earned Income Credit table and fill out the EIC worksheet in the Form 1040, 1040A, or 1040EZ instruction books. Earned income includes any taxable wages an individual receives. Tips, union strike benefits, and self-employment wages are all included as taxable earned income. Some income which is not eligible includes gambling winnings, gifts, and some forms of investment returns.

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