5 facts about the Earned Income Tax Credit

earned income tax credit
earned income tax credit

For many Americans, it can be difficult to know which tax credits they qualify for and why. But tax credits are worth having because they provide meaningful savings on a filer’s overall tax contribution and, in some cases, lead to an increased tax refund.

One of the most beneficial and refundable tax credits for families with low or moderate incomes is the Earned Income Tax Credit (EITC).

Here are five facts about the EITC all taxpayers should know.

1. Eligibility is limited to low-to-moderate income earners

The general eligibility rules for the EITC are fairly straightforward:

  • Taxpayers must file as individuals or married filing jointly.

  • If married, you, your spouse and your qualifying children must have valid Social Security numbers.

  • You must also be 25 or older but younger than 65.

Although the EITC typically is considered a credit for low-income filers, there are many variations of income, filing status and number of qualifying dependents that affect eligibility. For example:

  • In 2019, a married couple with three children and adjusted gross income of $55,592 or less could receive up to $6,557.

  • An individual who earns $15,570 and has no children may receive up to $529.

It's recommended that all filers explore their eligibility for receiving the EITC each year. For the 2019 tax year, the maximum credit is $6,557. According to the Internal Revenue Service, the average amount credited in 2018 was $2,488.

2. Self-employed still counts

Many filers, especially self-employed individuals, fail to take advantage of credits because they think they are ineligible.

The IRS considers all income that is earned eligible for the credit. That includes:

  • Wages

  • Salaries

  • Tips

  • Union strike benefits

  • Long-term disability benefits received prior to minimum retirement age

  • Net earnings from self-employment

  • Gross income received as a statutory employee (an independent contractor under common law rules)

Types of income that do not qualify as earned income for the credit include:

  • Child support

  • Retirement income

  • Social Security benefits

  • Unemployment benefits

  • Alimony

  • Pay received for work while in prison

3. Investment income can disqualify you

In 2019, income derived from investments disqualifies you if it is greater than $3,600 in one year, including income from stock dividends, rental properties or inheritance.

4. Eligibility fluctuates

Taxpayers should pay attention to their EITC eligibility every filing year as tax laws and personal tax situations can change. Changes that could affect your eligibility for the EITC can include

  • a new job,

  • unemployment,

  • loss of an annual bonus,

  • a change in marital status, or

  • a change in a spouse's employment situation.

5. Tax software can help

Because the EITC is one of the most lucrative credits available to struggling Americans, filers should consider using a qualified tax software system to maximize the earned income credit. Electronic tax programs offer an advantage over traditional pen and paper tax preparation because, so long as you enter your information accurately, they ensure that you receive the tax benefits you deserve.

Losing EITC

Like everything else associated with the IRS, it doesn't pay to be dishonest. The IRS may reduce or even revoke a filer's access to the Earned Income Tax Credit for a number of years if the agency determines the filer committed fraud or flouted the rules to obtain the credit.

  • If the IRS finds that someone recklessly disregarded the rules to increase the credit, it may prohibit the filer from receiving the credit for two years, after which the filer would have to file a special request form to apply for the right to claim the credit.

  • In the event the IRS determines a filer has supplied fraudulent financial information to claim the EITC, it may penalize the filer by disallowing the credit for 10 years.

These penalties do not apply to math or clerical errors.

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Originally published