Earned Income Tax Credit Basics

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Discussion
The purpose of this article is to discuss the basic rules surrounding the earned income credit. The earned income tax credit is designed to benefit low to moderate income taxpayers with larger benefits extended to people with children. The tax credit is claimed using Form 1040/1040A/1040EZ, and if qualifying children are being claimed, Schedule EIC. The amount that a taxpayer claims as a credit can be found in Publication 596 (linked below). The amount varies based on the number of children a taxpayer is claiming as well as the filing status. A taxpayer might be prohibited from claiming the earned income tax credit if they engaged in reckless or intentional disregard for the EIC rules. To claim the EIC, the taxpayer must meet the following requirements:

1. AGI Limitations (less than $48,340 single - $53,930 married filing jointly - varies based on number of children);
2. Valid Social Security Number;
3. Cannot have the filing status Married Filing Separately;
4. Must be a U.S. Citizen or Resident Alien for the entire year;
5. Cannot file form 2555/2555EZ (foreign earned income);
6. Investment income must be $3,450 or less; and
7. Must have earned income.

To claim the increased earned income credit, a taxpayer must claim a qualifying child as a dependent. As the definition of a qualifying child has been explained in another posting, I won't go into further detail here. If a taxpayer cannot claim a qualifying child, the following criteria must be met to claim the earned income credit:

1. Must be at least 25 but under 65;
2. Cannot be claimed as a dependent of another person;
3. Cannot be a qualifying child of another taxpayer; and
4. Must have lived in the United States for more than half the year.

If a taxpayer does not feel comfortable calculating their earned income credit, they can request the IRS to calculate it for them.

References

https://www.irs.gov/pub/irs-pdf/p596.pdf https://www.irs.gov/pub/irs-pdf/f1040sei.pdf

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.