What is Earned Income Credit?

in Tax Information


The Earned Income credit (EIC), or more properly the Earned Income Tax Credit (EITC), is a refundable tax credit that is available to many lower income tax payers based on a means test. Since enacted in 1975, the EIC has evolved into a much larger tax credit than originally envisioned and one of the most successful federal programs to assist low income people. In fact, the idea of the EIC has been so successful that today many American states have their own EIC programs for state taxpayers as well. The EIC was specifically designed to offset the burden of payroll tax deductions and to actively encourage people to work, which is why it only applies to people that earn income. Contrary to the conventional wisdom about the EIC, it is available to people with or without children, though workers without children receive lower benefits and have to meet some additional conditions in order to qualify.

There are a number of personal information requirement that are necessary to qualify for the EIC before the means test is applied. These include: (a) the taxpayer must be a U.S. citizen, full time resident alien, or a non-resident alien married to an American citizen; (b) the taxpayer has to have a valid Social Security Number (SSN); (c) the taxpayer cannot be filing as “married, filing separately”; (d) the taxpayer has to have earned some income through employment, self-employment, or some other recognized sources; (e) the taxpayer cannot be the qualifying child of another person; and (f) the taxpayer cannot file Form 2555 or 2555-EZ related to earning foreign income. If the taxpayer meets these initial conditions, then the means test is administered.

The means test looks at both the level of earned income as well as the amount of investment income earned by the taxpayer. The exact amounts differ each year, but the IRS posts regular limits tables on its website allowing the taxpayer or his or her tax preparer to see what the relevant limits are for any given tax year. The income limits are based on the taxpayer’s adjusted gross income (AGI) and the annual limits change depending on how the taxpayer chooses to file. For example, people that are filing as “married, filing jointly” typically get higher limits than those filing otherwise. Further, the limits also vary depending on the number of qualifying children the taxpayer is claiming. Every year there are also caps, that limit the upper amount that can ever be claimed as EIC regardless of the other factors, but these caps also differ depending on the filing status and number of qualifying children.

The EIC can also be paid, at least in part, in advance by employers if they are so inclined. This is a popular option for low income workers since they receive their EIC in the form of larger regular paychecks as opposed to in one lump sum each year. As is the case with most matters related to tax matters, the payment of advance EIC credit is also carefully regulated. For example, regardless of the EIC that a particular worker may qualify for, in 2009 the absolute maximum advance EIC that can be received from employers is $1,826. There are also regular changes and adjustments made almost every year for one purpose or another. As an example of this, the American Recovery and Reinvestment Act (ARRA) provides a temporary increase in the amount of EIC available to some recipients that only applies for 2009 and 2010 as part of the national stimulus and recovery process.

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