Working taxpayers earning a low-to-moderate income can save money at tax time through the Earned Income Tax Credit (EITC). Originally enacted in 1975 as a temporary tax incentive, the EITC is a refundable tax credit for lower-income workers to offset the Social Security payroll tax and the rising cost of food and energy rates. Congress made the credit permanent with the Revenue Act of 1978; and, since then, has expanded and increased the EITC multiple times.
The following qualifications must be met in order to qualify for the EITC:
- Have worked and earned income less than $59,187. The most common type of earned income includes wages, salary or tips included on Form W-2 (box 1), and money made from self-employment. It does not include retirement income, social security, alimony, or unemployment benefits.
- Have less than $10,300 in investment income in 2022
- Have a valid Social Security number
- Been a U.S. citizen or a resident alien all year
- Have zero foreign earned income
- If applicable, meet certain rules if separated from a spouse and not filing a joint return.
Once qualified for the EITC, the amount of the credit varies depending upon a person’s earned income and the number of qualifying children, which is defined as follows:
- Has a valid Social Security number
- Meets all four tests for a qualifying child:
- Under age 19 at the end of the year and younger than the tax filer and/or spouse, if filing jointly. If the child is a full-time student, the age increases to 24.
- Child must be one of the following:
- Son, daughter, stepchild, adopted child, or foster child
- Brother, sister, half-brother, half-sister, stepsister, or stepbrother
- Grandchild, niece, or nephew
- The child must have lived with the claimant for more than half of the tax year.
- The child must not have filed a joint return with another person
On many occasions, a child may be a qualifying child for more than one taxpayer. In these cases, only one person can claim the EITC, which is typically the taxpayer who claims the related child tax benefits. Certain additional exceptions may apply to divorced parents. In order to claim the credit, Schedule EIC must be completed and included with the individual Form 1040.
IRS Publication 596 contains more information regarding Earned Income Credit. However, it is always advisable to contact a tax professional with questions concerning the eligibility of tax credits and/or other tax rules and regulations.
Author, Chris Ricker, CPA
Director of Tax
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.