Earned-Income Tax Credit (EITC): Definition & Overview
The Earned-Income Tax Credit (EITC) is a widely beneficial tax program for working individuals. It benefits people with low or moderate incomes by reducing the amount of taxes they owe. In many cases, it can also result in a refund.
The EITC is one of the most effective anti-poverty programs in the U.S.
This article covers everything you need to know about this tax credit. It includes eligibility guidelines, how it works, and common misconceptions.
If you’re an employee and meet specific requirements, read on to learn more about this potential tax benefit.
Table of Contents
KEY TAKEAWAYS
- The earned income tax credit is a refundable tax credit for low- and moderate-income taxpayers.
- The amount of the credit depends on the taxpayer’s income levels and the number of qualifying children and other dependents in the household
- The credit can reduce the amount of taxes owed or result in a refund if the credit exceeds the amount of taxes owed.
What is Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is a refundable federal income tax credit. It’s available to low- and moderate-income working employed people.
The credit rewards boost the incomes of people with low or moderate wages. It is also one of the largest federal assistance programs that benefits families with children.
It’s a refundable credit which means if the amount of the credit is greater than the amount of tax you owe for the year, you will receive a refund for the difference.
The most common misconception about the EITC is that it is a handout to low-income workers. In fact, it is a refundable tax credit that people have to earn by working for someone else or are self-employed.
How Does Earned Income Tax Credit Work?
The amount of the earned income tax credit depends on your taxable income. Also considered are your number of children as well as your tax filings. The credit has different income limits for each state.
The federal government sets these income limits each year, based on inflation. State and federal governments fund the EITC as an incentive for families with children to enter the workforce.
Doing so enables you to keep more of your earned money by applying this credit against the income taxes you pay.
What Are The Benefits Of Earned Income Tax Credit?
This credit helps low- and moderate-income workers with their income tax burden. This can help you get a bigger refund or reduce the amount you owe when you file your annual tax return.
The credit can also help to offset the cost of living for low- and moderate-income taxpayers. For example, the credit can help pay for child care or transportation costs.
Additionally, the credit can help to boost the economy by putting money back into the pockets of low- and moderate-income taxpayers.
As you can see, the earned income tax credit can be a valuable tool for low- and moderate-income taxpayers.
Who Is Eligible For Earned Income Tax Credit?
For you to qualify for the earned income tax credit, you must meet the following criteria:
You cannot have income investment of more than $10,300.
You cannot have foreign income.
You must have earned income. You can earn it by being an employee and can also be self-employed, a business owner, or a farmer who takes a Schedule F on their tax return.
You must have a Social Security number that is valid for employment and be a U.S. Citizen or a resident alien all year. If you’re in the U.S. legally, you should have a Social Security number. If you are a resident alien (a Green Card holder) you can qualify for the EITC only if you had the green card for a whole year.
What Is The Income Limit For The Earned Income Credit?
The income requirements for the earned income credit depends on the number of qualifying children and other dependents in your household. In 2022, for households with one child, the maximum income limit is $43,492 or $49,622 if married filing jointly. For households with two children, the maximum income limit is $53,059 or $59,187 if married filing jointly.
For households with three or more children, the maximum income limit is $6,728. You can still qualify for EITC if you don’t have any dependents. In that case, you have to be between 25 and 65 years old and not earn more than $16,480 or $22,610 if married filing jointly.
To learn more about the earned income credit and how it can benefit you and your family, be sure to visit the IRS website and look for IRS Publication 596. If you’re not sure if you qualify for the EITC, you can use the EITC Assistant tool to find out.
The above numbers may change each year, as they are adjusted for inflation. As such, it’s a good idea to check the IRS’s website when you’re ready to claim to make sure you have updated data.
Example Of Earned Income Tax Credit
If you filed your income taxes as a single mother in 2021, had two qualified children, and earned $12,000 in taxable household income, your earned income tax credit would be $4,180.
You can use the EITC Assistant on the IRS website, review the EIC Table in IRS Publication 596 or consult a tax professional to determine if you’re eligible for the credit and how much you may be able to receive.
When you do, you will need to discuss how many dependent children you have. Be sure to mention whether you have children with disabilities. You will also need to disclose if you have self-employment income.
This gives the tax professional an idea of your income distribution. Whether you’re a family with children or a family without children, it’s worth looking into.
The EITC helps millions of people each year, offering tax breaks for people in need. It’s a great incentive for working-age people to take advantage of the credit.
Summary
The EITC is a great way to supplement your income and reduce the amount of taxes that you owe. It is particularly beneficial to people who earn a low or moderate income, as they can receive a sizable tax refund.
To claim this credit, you must file a federal tax return, even if you’re not required to file one. You can use TaxCaster, the EITC Assistant tool, or another tax-preparation software to see if you qualify for the EITC.
FAQs on Earned Income Tax Credit
The Earned Income Credit is a great way to reduce your tax liability if you’re a low or moderate earner. It can also result in a refund if the credit is larger than your tax liability.
To qualify for the Earned Income Credit, you must have earned income from employment or self-employment. Additionally, you must meet certain criteria related to your filing status, age, and number of children.
If you’re entitled to the Earned Income Credit, it pays out to you either through a reduction in your tax liability or as a refund. The timing of the payment will depend on when you file your tax return and the IRS processing times. The earliest you will receive a refund is mid February.
No, you cannot receive the Earned Income Credit if you have no income. To qualify for the credit, you must have earned income from employment or self-employment.
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