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Earned Income Credit (EIC): What Is It And How Does It Work?

Ben Luthi4-minute read
December 03, 2021

The earned income tax credit, also known as EITC or EIC, is a refundable tax credit that's available for low- to moderate-income taxpayers who work and earn an income. Understanding how the EIC works can help you maximize your tax refund during tax season.

What Is EIC?

The EIC is a tax credit, which means that if you qualify, it can reduce your tax liability dollar for dollar. And because it's a refundable tax credit, it can be included in your tax refund if you don't owe anything based on your income and other tax breaks.

The EIC can range between $1,502 – $6,728 and is dependent on your income, how many children you have and your filing status. That said, you don't need to have children to be able to receive the credit.

Based on the various factors that go into determining eligibility, the EIC is a percentage of your earnings up to the maximum amount allowed.

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Who Qualifies For The Earned Income Tax Credit?

According to the Internal Revenue Service, the EIC or EITC is available for taxpayers who meet certain criteria. For starters, you need to have earned income to qualify.

Here's an EIC table for the 2020 tax year showing the maximum income levels based on your earned income and adjusted gross income (AGI):

 

Number of Children

Max Earned Income and AGI if Filing on Your Own

Max Earned Income and AGI if Filing a Joint Return

0

$21,430

$27,380

1

$42,158

$48,108

2

$47,915

$53,865

3 or more

$51,464

$57,414

Other requirements include:

  • Having a valid Social Security number and be a U.S. citizen or resident alien all year.
  • An investment income for the year must be $10,000 or less.
  • A minimum of $1 of earned income (which unemployment and pensions do not count toward).
  • Not filing Form 2555, which is related to foreign earned income.
  • Married couples must file jointly.

If you have qualifying children, they can't be a qualifying child for another tax return. Additionally, they must meet the relationship, age, residency and joint return tests established by the IRS. Finally, no one can claim you as a qualifying child on their tax return.

If you don't have children, you need to be 25 – 64 years old. You also need to have lived in the U.S. for more than half the tax year, and you can't be claimed as a dependent or qualifying child on someone else's tax return.

Note that the IRS has also established special rules for members of the clergy or members of the military, and those who receive disability income or care for children with disabilities.

Requirements For EIC Tax Credit

Digging more into the details, here are some of the tests you'll need to pass if you want to claim qualifying children for the EIC:

 

  • The child must be a daughter, son, stepchild, adopted child, foster child or grandchild. They can also be your brother, sister, half-brother, half-sister, stepbrother, stepsister or related to you as a niece or nephew.
  • The child must be under age 19 at the end of the year, or under 24 if they were engaged as a full-time student. Age limits do not apply to children who are permanently disabled.
  • Any child claimed must have lived with you or your spouse for more than half the year within the United States of America.
  • Each child must have a Social Security number, which you must cite along with their birthdate.

To calculate how much you'll receive from the EIC, you'll use the EIC Worksheet included in Form 1040 or 1040SR. There's a separate worksheet for taxpayers who were self-employed at any time during the tax year or who are a member of the clergy, a church employee who files Schedule SE or a statutory employee filing Schedule C.

If you have one or more qualifying children, you'll also need to complete Schedule EIC and include it in your tax return when you file.

If you need assistance, consider working with a tax professional or using a tax preparation service.

Earned Income Credit FAQs

The EIC can be complicated, so it's important to understand the requirements and rules before trying to claim it. Here are some of the most frequently asked questions by taxpayers who try to take advantage of the EIC tax credit.

What is the earned income credit for 2021?

The amount you can claim varies depending on your adjusted gross income, number of children and filing status. Here's the maximum you can receive based on the number of qualifying children you have:

  • Zero children: $1,502
  • One child: $3,618
  • Two children: $5,980
  • Three or more children: $6,728

Do I have to have a low income for the EITC?

The credit is available for taxpayers with low to moderate income. Review the income requirements above to determine if you're eligible to receive the credit.

Can I claim the EIC from previous years?

If you qualified for the EIC tax credit in a previous tax year but didn't claim it, you can go back and amend a previous year return to receive the credit. The IRS provides income tables going back several years on its website to help you figure whether you're eligible and how much you might be able to receive.

Keep in mind, though, that you usually only have 3 years from the date you filed your original return to amend it for the purposes of claiming a refund. Alternatively, you can file an amended return within 2 years from the date you paid tax you owed on a return if that date is later than the first one.

Is earned income tax credit the same as child tax credit?

The EIC is a separate credit from the child tax credit. While it's possible to receive the EIC without children, you must have at least one child to claim the child tax credit. They also differ in income requirements, refundability and other aspects.

The Bottom Line: EIC Is Designed To Help

The earned income tax credit can provide a tax break for qualifying people. However, there are several rules you'll need to follow to determine if you're eligible, and you'll need to use a worksheet to determine how much you qualify to receive.

If you're planning to do it on your own, learn more about the EIC on the IRS website. Alternatively, you can work with a tax professional or use a tax preparation service to help you file your tax return and determine your eligibility.

Also, take the time to check out the Rocket HQSM Personal Finances archives for more finance information and tips.

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Ben Luthi

Ben Luthi is a freelance writer who covers personal finance and travel. He has a B.S. in Business Management with an emphasis on Finance from Brigham Young University.