The Earned Income Tax Credit (EITC) is one of the most significant tax credits available in the entire IRS tax code. It is also simultaneously one of the most complicated and popular tax credits as well. So I thought I should provide a long overdue basic overview of what the Earned Income Credit is, including qualifications, qualified children rules, maximum amount, income limits, income tables, calculators, and more.
What is the Earned Income Tax Credit?
Let’s start with a basic description of the Earned Income Tax Credit, which is also commonly referred to as the EITC, Earned Income Credit, and EIC. The EITC is a significant tax credit for lower and lower-middle income taxpayers that rewards earned income, particularly for those with children. It was first enacted under the Ford administration in 1975 and was built with the dual purpose of incentivizing the earning of income and reducing poverty. Its popularity and impact has led to bi-partisan political support and expansion a number of times since it was created, making it one of the largest social welfare programs in the United States today.
The Earned Income Tax Credit is a refundable tax credit, which means that it not only can be subtracted from taxes owed, but can be refunded to the taxpayer if taxes are not owed.
How Much is the Earned Income Credit?
The EITC can be worth as much as $6,431 for the 2018 tax year and $6,557 for the 2019 tax year. However, the credit amount varies significantly depending on tax filing status, number of qualifying children, and income earned. It is phased in and then phased out at certain income thresholds.
Earned Income Tax Credit Qualifications
There are a number of qualifications that must be met in order for a taxpayer to be eligible for the Earned Income Tax Credit.
1. You must first have taxable “earned income”. Taxable earned income includes any of the following:
- Wages, salaries, tips, and other taxable employee pay
- Union strike benefits
- Long-term disability benefits received prior to minimum retirement age
- Net earnings from self-employment if:
- You own or operate a business or a farm or
- You are a minister or member of a religious order (special rules apply)
- You are a statutory employee and have income. (statutory employees are contractors and will have a box on their W2 designating them as ‘statutory’)
Taxable earned income does not include:
-
Pay received for work while an inmate in a penal institution
-
Interest and dividends
-
Retirement income
-
Social security
-
Unemployment benefits
-
Alimony
-
Child support
2. You, your spouse, and any qualifying child must have an eligible Social Security # that is valid for employment.
3. You can be any filing status except “married filing separately”.
4. You have qualified children, OR
- You (and your spouse if you file a joint return) meet all the EITC basic rules AND
- You (and your spouse if you file a joint return) cannot be claimed as a dependent or qualifying child on anyone else’s return, AND
- You (or your spouse if you file a joint return) are between 25 and 65 years old at the end of the tax year, usually Dec. 31.
5. Your income falls within the eligible income range (highlighted below).
6. Your tax year investment income must be $3,500 (2018) or $3,600 (2019), or less, for the year.
7. Must not file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion. In other words, you must have lived in the U.S. for more than half of the year.
Earned Income Credit Qualifying Children
While it is possible to qualify for the Earned Income Credit without children, the amount of the credit increases with each qualified child. Qualified children must meet each of the eligibility tests:
Relationship Test:
- Your son, daughter, adopted child, stepchild, foster child or a descendant of any of them such as your grandchild
- Brother, sister, half brother, half sister, step brother, step sister or a descendant of any of them such as a niece or nephew
Age Test:
- At the end of the filing year, your child was younger than you (or your spouse if you file a joint return) and younger than 19
- At the end of the filing year, your child was younger than you (or your spouse if you file a joint return) younger than 24 and a full-time student
- At the end of the filing year, your child was any age and permanently and totally disabled
Residency Test:
Child must live with you (or your spouse if you file a joint return) in the United States for more than half of the year
Joint Return:
The child cannot file a joint return for the tax year unless the child and the child’s spouse did not have a separate filing requirement and filed the joint return only to claim a refund.
Tiebreaker Rules:
Note that only one person can claim a specific qualified child (i.e. in cases of divorce). There are special “tiebreaker rules“.
Earned Income Credit Table for 2018 Income Limits & Maximum Amounts
In addition to the aforementioned qualifications, you must have earned income and adjusted gross income (the greater of which is used) within certain income limits in order to qualify for the earned income credit.
Here is the Earned Income Tax Credit table for the 2018 tax year:
| Filing Status | No Qualifying Children | 1 Qualifying Child | 2 Qualifying Children | 3+ Qualifying Children |
|---|---|---|---|---|
| Single, Head of Household, Widow(er) Threshold Phaseout: | $8,490 | $18,660 | $18,660 | $18,660 |
| Single, Head of Household, Widow(er) Completed Phaseout: | $15,270 | $40,320 | $45,802 | $49,194 |
| Married Filing Jointly Threshold Phaseout: | $14,170 | $24,350 | $24,350 | $24,350 |
| Married Filing Jointly Completed Phaseout: | $20,950 | $46,010 | $51,492 | $54,884 |
The EITC maximum credit amounts for 2018 are:
- $6,431 with three or more qualifying children
- $5,716 with two qualifying children
- $3,461 with one qualifying child
- $519 with no qualifying children
Earned Income Credit Table for 2019 Income Limits & Maximum Amounts
And here is the Earned Income Tax Credit table for the 2019 tax year:
| Filing Status | No Qualifying Children | 1 Qualifying Child | 2 Qualifying Children | 3+ Qualifying Children |
|---|---|---|---|---|
| Single, Head of Household, Widow(er) Threshold Phaseout Amount: | $8,650 | $19,030 | $19,030 | $19,030 |
| Single, Head of Household, Widow(er) Completed Phaseout Amount: | $15,570 | $41,094 | $46,703 | $50,162 |
| Married Filing Jointly Threshold Phaseout Amount: | $14,450 | $24,820 | $24,820 | $24,820 |
| Married Filing Jointly Completed Phaseout Amount: | $21,370 | $46,884 | $52,493 | $55,592 |
The EITC maximum credit amounts for 2019 are:
- $6,557 with three or more qualifying children
- $5,828 with two qualifying children
- $3,526 with one qualifying child
- $529 with no qualifying children
Can you claim both the EITC and Child Tax Credit in the Same Year?
Although I have not personally done this, it is my understanding that you can claim both the Earned Income Credit and Child Tax Credit within the same year if you meet all of the qualifications for each. In other words, they are not mutually exclusive credits.
Earned Income Credit Calculator
The Earned Income Credit is automatically calculated in IRS form 1040, however, there are some alternatives if you’d like to play with the numbers.
As noted before, the EITC is one of the most complicated tax credits in the entire tax code, with a whole host of qualifying criteria. If you’d like to use a calculator to determine the amount of credit you might be eligible for, there are a few EITC calculator options:
- IRS EITC assistant: the most comprehensive – the EITC goes through all of the qualifying criteria to first determine eligibility (make sure you select the appropriate tax year).
- Bankrate EITC calculator: gives you a quick and dirty number, not taking into account eligibility.
For More Information on the Earned Income Credit
There are even more special rules and qualifications that what I’ve highlighted here, so you’ll need to do your due diligence. For more information, visit the IRS EITC topic and EITC Central.
Related Posts:
Thank you for de-mystifying EITC! This is something I have always wanted to become familiar with and your post is of great help.
That’s why I wrote it. I had always heard a lot about the EITC, but didn’t know the inner workings. Glad to hear it was helpful.
How can people live income less than 55k and have 3 Kids?
Remember, not everyone with three kids planed to be down on their luck. Jobs vaporize, marriages end, people die, some grandparents are raising kids. Do you think minimum wage earners ($7.25 in my area) or even those getting twice minimum wage, get $55K annually? Do the math. $14.50 hourly x 40 hours per week x 52 weeks per year = $30,160 annualy.
How it is done: For starters, live in an area with a lower cost of living. Then rely on lots of public assistance. LIHEAP Heating assistance, food pantries, free, used clothing/coat giveaways, SNAP, WIC, Commodities for seniors, community meals, less than trustworthy child care. Scholarships for any activities the children want to participate in. Going without things like cell phones, and cable TV.
Society pays one way or another. Give people self-respect by respecting them enough to pay a living wage for a fair days work. http://livingwage.mit.edu
I’d like to point out that earning over 20K/yr, pretty much disqualifies one from most forms of public assistance other than perhaps children’s Medicaid and LIHEAP. I’ve raised my two son’s (now 25 & 17) for the most part on my own after my divorce, My income is up to $40K now. I spend many of those years in the $20-30K range. This income range qualified my children for only Medicaid/Healthy kids, with 2 exceptions when my income was at its lowest: there were 2 winters that I qualified for $300 for heating fuel and almost a yr of infant/child care ($80/wk), which I lost when I received a $20/wk raise.
You ask, how do you live off less than $40K with two kids?? You learn to budget and shop wisely. You don’t live in a large house with lots of stuff. You live in an apt or mobile home. You buy used cars and furniture. You use coupons whenever possible. You don’t use credit cards, you put a little bit at a time in a savings account then pay yourself back with interest when you “borrow” from it.
You spend an entire year stashing every $5 bill received as change from $10’s and $20’s in a little pickle jar so when December arrives there’s money for Xmas gifts. Which, by the way, is pretty much the only time of year, other than birthdays that money is spent on “Wants” instead of “Needs”.
Most importantly, you teach your children that “things” are not “given”, they are “earned”.
Alex, it is possible. I live in Washington, have a job and three kids ,and we don’t live on welfare. My take home a year is around $50k. We just live under our means and have a budget every month. I also contribute to my 401k and HSA. I know all that sounds crazy, but it is possible.
$55K is decent money in many parts of the U.S. especially down South. There are hundreds of thousands of people who live on $55K (or less) with 3 (or more) kids. Like many have said, watch the spending and don’t buy a bunch of “wants”. Stick to the needs.
is this also allocated in india?