First: what is Earned Income Credit (EIC)? Like Child Tax Credit, Earned Income Credit is a refundable credit designed to assist individuals with modest or low incomes who are employed. Here’s the key word: employed. That means, a taxpayer who is claiming Earned Income Credit must have wages or self-employment income. It’s all about rewarding you for being employed. The taxpayer should have received W-2 wages, or income from self-employment (reported in 1099-NEC, 1099-MISC, etc). The credit amount depends on earned income, filing status, and the number of dependents (although it doesn’t increase after 3 dependents). There are phase-in and phase-out ranges based on earned income.
Why is Earned Income Credit important? For those with low incomes, the EIC can be substantial, with a maximum credit of up to $7,430 for those with three or more qualifying children. This can make a real difference in your tax refund, which is why many people try to file their taxes early to claim this credit.
EIC Thresholds for 2023:
- Earned Income and AGI must each be less than:
- $56,838 ($63,398 for MFJ) with three or more qualifying children
- $52,918 ($59,478 for MFJ) with two qualifying children
- $46,560 ($53,120 for MFJ) with one qualifying child
- $17,640 ($24,210 for MFJ) with no qualifying children.
Maximum Credit for 2023:
- $7,430 with three or more qualifying children
- $6,604 with two qualifying children
- $3,995 with one qualifying child
- $600 with no qualifying children.
What Are the Requirements to Claim EIC?
To qualify for EIC, you must meet the following rules:
- Have a valid Social Security Number
- Earned Income and AGI must be below certain limits
- Have earned income from employment or self-employment
- Cannot file as Married Filing Separately (MFS)
- Must be a U.S. citizen or resident alien
- Cannot be the qualifying child of another person
- Must live in the U.S. for more than half the year
- Cannot file Form 2555 (related to exclusion of foreign earned income)
Is it Possible to Claim Earned Income Credit if I Filed Married Filing Separately?
For tax years beginning in 2021 or later, you may qualify for EIC if you file as Married Filing Separately and meet certain conditions, such as not filing a joint return with your spouse and having a qualifying child who lived with you for more than half the year.
What Income is Considered Earned Income?
Earned income includes wages, salaries, tips, net earnings from self-employment, gross income as a statutory employee, nontaxable combat pay, minister’s housing, and certain disability benefits.
I Don’t Have Income This Year, What Should I Do?
Individuals affected by qualified federal disasters may elect to use earned income from the preceding year for calculating EIC.
What’s the Requirement to Claim EIC with a Qualifying Child?
To claim EIC with a qualifying child, the child must meet relationship, age, residency, and other tests. There are specific rules for children of divorced or separated parents.
Can I Claim EIC Without a Qualifying Child?
Individuals without a qualifying child may still be eligible for EIC if they meet certain criteria, including age, income, and residency requirements.
What Should I Do if My Child is Claimed by Another Taxpayer?
If a child qualifies as a dependent for more than one person, tiebreaker rules determine who can claim the child for EIC purposes.
What Should I Do in Case of IRS Audits?
Be prepared! We’ve found that the Earned Income Credit claims are frequently audited by the IRS. These audits can be random, but sometimes it can make sense. For example: a taxpayer earning $12,000 a year is claiming three dependents. How can a taxpayer be responsible for supporting a four-people household? One might argue that the taxpayer might be getting welfare or government help. That could be true. The IRS most likely have a system that detects red flags and starts an audit. In the event of an audit, taxpayers must be able to substantiate their EIC claims with documentation, especially for claims with a qualifying child.
Is My Income Considered Earned Income?
Simply put, if you get paid for working, your income is most likely Earned Income. If your income comes from this list below, it is Earned Income. Earned income includes all the taxable income and wages you get from working for someone else, yourself, or from a business or farm you own.
- Wages, salary, tips, bonuses, or commissions, where federal income taxes are withheld on Form W-2, box 1
- Income from your side hustle, gig work, freelance, contract work, selling collectibles online, rideshare driving, etc.
- Benefits from a union strike
- Certain disability benefits you got before you were the minimum retirement age
- Nontaxable Combat Pay (Form W-2, box 12 with code Q)
- If you claim nontaxable combat pay as earned income, it may increase or decrease the amount of your EITC. For more information, see Publication 3, Armed Forces’ Tax Guide.
Earned income does not include investments or government benefits, such as:
- Pay you got for work when you were an inmate in a penal institution
- Interest and dividends (because your money does the work, not you)
- Pensions or annuities
- Social Security
- Unemployment benefits
- Alimony
- Child support
Conclusion:
The EIC is a valuable tax credit for those with lower incomes who work hard. It is important to understand the eligibility criteria and keep accurate records to support any claims.