All You Need to Know About Earned Income Tax Credit

Each year, working people with low and moderate income receive a federal tax credit known as Earned Income Tax Credit, (EITC) which helps them reduce their tax liability and improve their standard of living. In the U.S. there are also currently 26 states, plus the District of Columbia, that offer EITC to families as a way to supplement the federal EITC credit.

The EITC’s main objectives are to:

  • Encourage employment
  • Augment low wages
  • Alleviate poverty

Eligibility Criteria for EITC

To be eligible for EITC, you must meet the following requirements:

  1. If you and your spouse are married, you must file a joint return and  all people listed on Schedule EIC must have a Social Security Number (SSN) that is valid for employment.
  2. Your source of earned income must be either earned through employment or through the ownership or management of a  farm or business
  3. You must be a United States citizen
  4. You cannot be a qualifying dependent of another taxpayer
  5. You cannot file any forms related to foreign earned income (Form 2555 or Form 2555 EZ)
  6. You must meet the income limit requirements for the earned income, annual gross income (AGI) and investment income
  7. Lastly, you must either:
  1. a) have a qualifying child

or

  1. be between 25 and 64 years of age on December 31 of the tax reporting year and have lived in the United States for more than six months during the tax reporting year

EITC Parameters for Individuals

The amount of EITC that an individual receives is dependent upon income, marital status and the number of dependent children. The table below shows how the income limits vary with the marital status and the number of qualifying children. The following is applicable for the tax year 2015 (due in April 2016).

Marital Status Qualifying Children Claimed
Zero One Two Three or more
Single, Head of Household or Widowed $14,820 $39,131 $44,454 $47,747
Married Filing Jointly $20,330 $44,651 $49,974 $53,267

In addition to the earned income benchmark, investment income is limited to a maximum of $3400.

The maximum EITC credit awarded depends upon the number of qualifying children. The maximum amounts for the year 2015 is as follows:

Qualifying Children Claimed
Zero One Two Three or more
Maximum Credit Amount $503 $3,359 $5,548 $6,242

Some Interesting Facts About EITC

Here are a few facts published by the Center on Budget and Policy Priorities in a 2013 report:

  • More than 27 million working families and individuals have received EITC.
  • EITC has helped 6.2 million people, including 3.2 million children, to live above the poverty line.
  • EITC was instrumental in reducing the poverty severity level of 21.6 million individuals, including 7.8 million children.
  • The average family credit of $3074 boosted monthly wages by approximately $256. The credit received by a family without no eligible children was a marginal $281.

Last Few Words

Though the EITC amount for families with children is sufficient enough to help them live above the poverty level, the EITC amount for childless workers is too small to even fully offset their federal taxes. As a result, childless workers bear a tax burden that often pushes them further below the poverty line. It is, therefore, expected that the IRS will make adjustments due to its growing concern over the issue.

All You Need to Know About Earned Income Tax Credit
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